As we get ready to welcome 2020, many shareholders are wondering if they are likely to see strong gains in Santa Monica, California-based Activision Blizzard’s (NASDAQ:ATVI) stock price. Year-to-date, ATVI shares are up over 25%. By comparison, the VanEck Vectors Video Gaming and eSports ETF (NASDAQ:ESPO) has increased almost 40% in the same period. ATVI stock is the exchange-traded fund’s fourth-biggest holding of 26 names in the portfolio.
Activision Blizzard is one of the largest gaming companies globally in terms of revenue and market cap. The rise of the digital gaming revolution is here to stay and I believe the long-run fundamental story of ATVI stock is intact. With its strong franchise focus, Activision Blizzard is an important company that is likely to weather the ebbs and flows of the industry.
However, holiday season shopping numbers in general affect the ATVI share price considerably. Therefore long-term investors may want to wait for Q4 results, expected in early February 2020, before committing any new capital into ATVI stock.
Industry Leaders Provide the Long-Term Tailwind for ATVI Stock
The global gaming market has been growing at a rapid rate and is expected to exceed $180 billion in revenues in 2021.
Activision Blizzard’s franchise across console, PC, and mobile gaming platforms includes popular titles, such as World of Warcraft, Diablo, StarCraft, Call of Duty, Overwatch, and Candy Crush.
Within the overall industry, the success of mobile gaming, which accounts for half of global gaming revenue, is one of the most important drivers behind this growth.
And Activision Blizzard is continuing to bet big on esports. For example, in 2018, the group launched hoping the Overwatch esports league where competitive video games meet spectator entertainment. Investors are hoping that a larger fan base would also translate into more live events and merchandise sales.
Going forward, analysts believe esports will become a major disruptive force. Most of the revenues for the companies in this segment currently come from North America and China.
Growing middle classes in many countries are likely to fuel entertainment technology adoption. In addition to China, the Street is watching the growth of the industry in India, a country with a population of 1.4 billion. Analysts expect the Indian gaming industry to grow more than $1 billion within two years. And half of that growth is from mobile gaming.
In 2020, holders of ATVI stock would like to see that Activision Blizzard is successfully monetizing its current games worldwide through esports.
Investors Pay Attention to ATVI Stock Competition
The past decade has seen a surge in the popularity of video gaming. And in the next few years. globally, it is expected to grow at 6.4% at a compounded annual growth rate (CAGR). Inevitably, such a lucrative industry attracts many companies.
ATVI stock competes globally with other gaming giants, including Electronic Arts (NASDAQ:EA), Take-Two Interactive Software (NASDAQ:TTWO), Tencent (OTCMKTS:TCEHY), Nintendo (OTCMKTS:NTDOY), Sony (NYSE:SNE), and Microsoft (NASDAQ:MSFT).
It is important to note that in late 2020, Sony is expected launch the Playstation 5 and that Microsoft is getting ready to release the latest generation of the Xbox. When a new generation of consoles gets underway, video game publishers like Activision Blizzard almost always benefit. However, the related revenues may not show in the earnings results until 2021.
Another competitor, Fortnite, the free-to-play apocalyptic survival video game developed and marketed by the privately held Epic Games, generated $2.4 billion in sales last year, more than any single game in 2018. And it has continued its dominance among gamers of all ages in 2019, too. Readers may be interested to know that global professional Fortnite players are some of the highest paid gamers.
Activision Blizzard relies on its franchise names. But competition like Fortnite tends to focus on video game volume. In other words, if ATVI’s core franchises were to lose popularity, the company would face fiscal and market consequences and the stock price would likely suffer.
Therefore, ATVI shareholders keep a close eye in the industry in general. In the coming weeks, any trading update from either Activision Blizzard or any of its competitors on holiday sales could likely affect the price of ATVI stock.
Q4 Earnings Result May Derail Activision Blizzard Stock
In general, Activision Blizzard stock price is highly sensitive to quarterly earnings and revenue performance.
And if the next earnings numbers do not come strong enough, investors may see it as a possible sign that competition is luring away ATVI fans.
In early November, when Activision Blizzard stock announced Q3 financial results, its monthly active users (MAUs) numbers failed to impress. MAU, which shows engagement levels, is one of the most important metrics used to analyze a gaming pure-play gaming company like ATVI.
When the number continues to increase, the Street gives premium valuation to ATVI stock for its high growth potential, and vice versa. Revenue in large part depends on game launch dates. Therefore, engagement levels can act a better gauge when analyzing gaming stocks.
Following the quarterly results, ATVI stock lost about 10% of its value in a matter of days. However, Activision Blizzard stock has built momentum as 2019 comes to a close. And it has since recovered and currently hovering around $59.
Similarly, in October 2018, ATVI stock had dropped 43% due to reduced MAU. In 2016, there were almost 500 million MAUs for all games. In 2018, the number fell to about 360 million.
Nonetheless, last month the Q3number came at 345 million active users. Needless to say, Wall Street was not impressed. And ATVI share price is still about 3o% lower than the high mark of almost $85 seen on Oct. 1, 2018.
Therefore, unless investors see improved MAU numbers in Q4 results, they may not be ready to hit the “buy” button in Activision Blizzard shares.
Bottom Line on ATVI Stock
In late 2018, ATVI stock got hammered by underperformance. Throughout 2019, management has been working hard to improve the outlook for the company. Therefore, analysts pay extra attention to quarterly results.
Could the recent year-end rally mean that shareholders are hopeful about ATVI’s rebound prospects?
Investors in Activision Blizzard shares do not want to see any further deterioration in MAU numbers. But attracting more players is not easy. And eventually, if MAU numbers do not pick up, revenue will suffer.
I would not bet against ATVI stock’s future. After all, gaming is still a relatively young industry. And Activision Blizzard is one of its most important names. Interactive entertainment will likely become more accessible as technology advances and the global middle class grows.
However, between now and the earnings release date, I expect to see further volatility and possible price weakness in Activision Blizzard stock.
A strong Q4 report may easily reignite the party in ATVI shares. But the reverse could also hold true.
So if you already own ATVI stock, you might want to keep your position and ride out any potential volatility around Q4 earnings season. Long-term investors may also regard any dip in the stock price as opportunity to go long the shares.
Finally, investors may also consider investing in various exchange-traded funds (ETFs) that have Activision Blizzard as a holding. In addition to VanEck’s ESPO, look at the Invesco Dynamic Software ETF (NYSEARCA:PSJ) or the Communication Services Select Sector SPDR (NYSEARCA:XLC).
As of this writing, the author did not hold a position in any of the aforementioned securities.