With novel coronavirus lockdowns easing, Activision Blizzard’s (NASDAQ:ATVI) second- and third-quarter growth may disappoint some investors. As a result, Activision Blizzard stock could retreat meaningfully following its second-quarter results.
Activision is due to report its Q2 results on Aug. 4.
Activision Rallied Amid Widespread Bullishness
The market seems to be fixated on all of Activision’s positive drivers. Of course, many pundits, including myself, have noted that the company is benefiting a great deal from the Covid-19 lockdown.
In an article published on May 4, I advised investors to buy Activision Blizzard stock ahead of the company’s first-quarter results. Among the reasons for my optimism were the shutdown and the extremely high popularity of the company’s Call of Duty: Modern Warfare and of its free-to-play Call of Duty: Warzone game.
Activision did indeed report stronger-than-expected first-quarter results, sending its shares higher. And since May 4, the company’s stock has jumped about 21%.
But in recent weeks, America’s situation has changed, and that could be reflected in the company’s guidance. As a result, the shares may drop meaningfully in the wake of Activision Blizzard’s second-quarter results.
The Lockdowns Have Greatly Eased
As almost everyone knows, the lockdowns have been greatly relaxed in recent weeks in the vast majority of states. Everything from beaches to casinos to stores to water parks to malls have reopened in much of the country.
At the same time, there are signs that more healthy young people have become well aware that their chances of dying from the coronavirus are extremely low. For example, many political leaders and health professionals have reported that young people aren’t following social distancing guidelines.
With the economy opening up, many young people who may have spent their money on video games two months ago could decide instead now to splurge on a two-day trip to a beach, water park or casino.
Negative Signs for Activision Blizzard Stock
One sign that the video-game business may have peaked in May or June is the fact that CNBC reported last month that AT&T (NYSE:T) was looking to unload its video game unit. According to the business news network, the unit could be worth as much as $4 billion.
Meanwhile, in an indication that the valuation of Activision Blizzard stock may have become overextended, the shares are nearing the price targets of many analysts who are bullish on the stock.
With ATVI trading near $80, many bullish firms’ price targets range from $83 to $90. For example, on June 25, KeyBanc increased its price target on the shares to $83 from $80 and on June 29, Benchmark raised its price target on the stock to $85 from $77. Finally, Needham on July 2 hiked its price target on Activision to $90 from $75.
In a column published on June 18, a writer for Seeking Alpha reported that, if the company meets its Q2 guidance, its revenue will be unchanged versus the same period two years earlier. Calling the guidance “conservative,” the author predicted that Activision’s actual second-quarter revenue will come in above its guidance.
I also believe that Activision’s top-line guidance is conservative and that its actual revenue will come in above its outlook. But given the many bullish notes about the stock from analysts and the surge of the stock in recent weeks, I believe that the vast majority of investors expect the company to beat its conservative guidance.
Therefore, even if Activision’s revenue beats its guidance, the stock will still fall if the firm’s third-quarter outlook comes in below investors’ expectations.
The Bottom Line on Activision Blizzard Stock
With many young people likely turning away from video games and towards other activities in the wake of the reopening of many activities, there’s a good chance that Activision’s third-quarter guidance could come in below investors’ elevated expectations.
Consequently, I recommend that investors take profits in the shares ahead of the firm’s second-quarter results.
As of this writing, Larry Ramer did not own any of the aforementioned stocks. Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.