Activision Blizzard (NASDAQ:ATVI) is one of the most important developers and publishers of interactive entertainment. After being a darling among investors from 2014 to the last quarter of 2018, over the past 12 months, ATVI stock is up only about 8%.
On Nov. 7, Activision Blizzard stock announced Q3 financial results. Now that the earnings season is behind us, many investors are wondering if ATVI stock can end the year on a much higher price.
In the coming weeks, I do not expect Activision Blizzard shares to make a strong move up. Let’s take a deeper dive to see why it may take at least another quarterly result to push ATVI stock higher.
ATVI Stock’s Q3 Results Got Mixed Reception
Activision Blizzard holds the keys to some of the biggest video game franchises. It is also one of the largest gaming companies globally in terms of revenue and market cap. The company operates through three main segments:
- Activision Publishing, which produces franchises such as Call of Duty and focuses on console gaming;
- Blizzard Entertainment, which produces franchises such as World of Warcraft and Overwatch and focuses on online PC games with an emphasis on subscription-based business models; and
- King Digital Entertainment, which produces mobile games.
When the group released financial results, it beat analyst expectations on both revenue and earnings. Yet the metrics were lower than those reported in Q3 last year.
Net revenue came at $1.28 billion, compared to $1.51 billion for the third quarter of 2018. Earnings per diluted share were 38 cents, as compared with 42 cents for Q3 2018.
However, Activision Blizzard’s monthly active users (MAUs), one of the primary metrics used to analyze gaming companies, continued to slide. Management aims to achieve a high number of unique users who participate in ATVI’s ecosystem at least once a month. For Q3, the number came at 345 million active users. Wall Street was not impressed.
In general, Activision Blizzard stock price is highly sensitive to quarterly earnings and revenue performance. Since Nov. 7, it is down about 5%.
Activision Blizzard Stock Faces Increased Competition
The poor performance of ATVI’s MAU numbers is in fact an indication of the competitive forces in the industry. Globally, video gaming is expected to grow at 4.8% compounded annual growth rate (CAGR) to reach $90 billion by 2020.
As a growth industry, gaming inevitably attracts competition that may also challenge the business models of companies like Activision Blizzard. For example, Fortnite, an apocalyptic survival video game developed and marketed by the privately held Epic Games, generated $2.4 billion in revenue last year, more than any single game in 2018. The free-to-play game has become a worldwide champion among gamers of all ages.
In recent quarters, earnings of ATVI stock, as well as those of major industry players like Electronic Arts (NASDAQ:EA) and Take-Two Interactive (NASDAQ:TTWO), have suffered because of Fortnite’s success. In October, ATVI shares were downgraded as Bernstein analyst Todd Juenger cut the price target for the stock from $43 to $41.
Inevitably, the whole industry suffered on the day of the downgrade. Therefore, investors should appreciate that another similar downgrade of ATVI stock or any of its peers could happen again in the weeks to come.
This is an industry where developers like Activision Blizzard live and die by the continued popularity of their titles and franchises. The company has to constantly renovate and update its offerings. Long-term investors may want to wait for Q4 results, expected in early February 2020, before committing any capital into ATVI stock.
Unless the numbers and the 2020 guidance are exceptional at the time, investors may decide not to invest in the stock for several more weeks — or even months.
Short-Term Technical Analysis of ATVI Stock
Despite the broader market rally of 2019 which has pushed the prices of many tech stocks significantly higher, year-to-date, Activision Blizzard stock is up only around 16%. On the other hand, the stock price of Electronic Arts (NASDAQ:EA) is up 25% in 2019.
ATVI stock’s 52-week price range has been $57.52 (Sept. 12, 2019)-$39.85 (Feb. 11, 2019). Activision shares have spent most of September, October, and November in a tight range between $57.5 and $52.5. Currently, the shares are hovering around $53.
Before long, I expect ATVI stock to break out of this current range, possibly to the downside, toward its 200-day moving average, a long-term trend-following technical indicator, which currently is at $48.47.
If you already own ATVI stock, you might want to hold your position. However, within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3%-5% below the current price point.
If you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a two-month time horizon. In that case, you may, for example, buy 100 shares of ATVI at a limit price of $53.73 (the closing price on Nov. 26) and, at the same time, sell a ATVI Jan 17 $52.5 call option, which currently trades at $3.
The $52.5 option is slightly in-the-money, offering downside protection in case of volatility and a decline in Activision Blizzard stock. It would also enable you to participate in a potential up move in ATVI share price. This call option would stop trading on Jan. 17, 2019, and expire on Jan. 18.
The Bottom Line on Activision Blizzard Stock
ATVI stock price is in general affected by holiday season shopping numbers. A recent investment thesis by Andrew Ravan at Johns Hopkins University concludes that “Q4 is historically ATVI’s strongest quarter – the holiday season brings in huge sales, as video games are bought on a large scale.”
Therefore, in the coming weeks, any trading update from either Activision Blizzard or any of its competitors would likely affect the price of ATVI stock.
With its strong franchise focus, Activision Blizzard is an important company that is likely to weather the ebbs and flows of the industry. The rise of the digital gaming revolution is here to stay, and I believe the long-term fundamental story of ATVI stock is still intact.
However, due to tough competition in the industry, Activision Blizzard is no longer a high growth stock. Therefore, long-term investors may want to re-visit their growth expectations. And they may regard any pull toward $50 or even $45 level as a good entry point.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.