After a terrible decline in the final calendar quarter of 2018, technically, Activision Blizzard (NASDAQ:ATVI) was bound for a comeback. Despite competition from less-expensive fare like Epic Games’ “Fortnite,” ATVI remains a brand to be reckoned with. Thus, I’m not surprised that Activision Blizzard stock is up into double-digit territory on a year-to-date basis.
But the real question is whether ATVI stock can build off this momentum. Here, the video game maker’s third quarter of 2019 earnings report offered a frustrating mix of answers and more questions. On the positive side, Activision delivered both a per-share profitability and revenue beat.
Against a consensus target calling for earnings per share of 23 cents, actual EPS came in at 38 cents. For revenues, covering analysts forecasted $1.2 billion, while ATVI rang up $1.28 billion. This also beat the company’s Q3 guidance of $1.11 billion. Theoretically, the results should have lifted Activision Blizzard stock.
However, the markets took a dim view on the comparable metrics. For example, in Q3 2018, the company delivered EPS of 42 cents. Also, in the year-ago quarter, Activision rang up $1.51 billion in revenue, a significant 15% decline year-over-year. Understandably, ATVI stock tanked following the earnings results.
To make matters worse, the game maker’s monthly active user count has dipped noticeably over the past several quarters. Moreover, MAUs are declining across all the company’s gaming divisions.
It’s a worrying narrative for Activision Blizzard stock because the underlying organization is already duking it out with rival Electronic Arts (NASDAQ:EA). Adding in relatively low-cost competitors like Epic Games saturates the market. Therefore, the Q3 results imply that Activision is bound for lower revenues.
Still, I think patience is key for ATVI stock.
Back to Basics for Activision Blizzard Stock
To answer the first criticism about MAUs, the gaming industry is cyclical; that is, developers can’t always churn out resounding hits every year. Subsequently, the lack of a fresh “World of Warcraft” title in 2019 has definitely hurt active user engagement metrics.
However, management recognizes the importance of “Warcraft” to the organization, so assuming that MAUs will continue to decline is a risk in itself. Plus, Activision’s mobile division will start churning out new titles, competing more effectively against Zynga (NASDAQ:ZNGA). Coincidentally, ZNGA looks a bit stretched.
But my enthusiasm for ATVI stock comes down to management learning key lessons. A few years back, Activision’s flagship franchise, “Call of Duty,” started to lose its character. With titles like “Advanced Warfare” and “Infinite Warfare,” CoD games transitioned from gritty, realistic depictions of combat to almost cartoonish imaginations of combat set well into the future.
The gameplay was still your typical exciting, action-packed first-person shooter fare. However, CoD has always emphasized realism. On the other hand, “Advanced Warfare” and “Infinite Warfare” were clearly fantasy games, with the sales drop providing confirmation.
However, in recent years, management has shifted its focus back to what its consumers want: gritty violence. Sure enough, sales of its World War II-themed CoD title in December 2017 produced enviable sales results.
Now, the latest CoD game, “Modern Warfare,” has broken several records, and it’s easy to see why. Featuring a realistic single-player campaign that is literally ripped from today’s headlines, CoD is no longer a video game. Instead, it’s like participating in a documentary. In fact,”Modern Warfare” is so realistic in its story-telling that the Russians have complained about their portrayal.
If that’s not a bullish signal for Activision Blizzard stock, I don’t know what is.
Wait for the Transition to Play Out
Admittedly, this longer-term case for ATVI stock will take some time to play out. And yes, the metrics for right now look disappointing, resulting in share price volatility.
But the bearish argument assumes that the disappointing trends we saw in Q3 will continue to cloud Activision Blizzard stock. If management showed no signs of adapting to the challenges, I wouldn’t disagree. However, the company’s strategy has changed. Rather than chasing fads, they’re going with what has always worked for the organization.
Further, ATVI has the potential to lever its various divisions more effectively. For instance, its flagship studios can focus energy and resources to creating compelling blockbusters like “Modern Warfare” now that they’ve realized not to deviate from their magic formula. And the company’s mobile division can cater gameplay to reflect the addictive, fast-paced style reminiscent of “Fortnite.”
Again, this will take time to play out. But the pieces and the strategy are finally aligned, making Activision Blizzard stock a strong but underappreciated bet.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.