The setbacks continue for Activision (NASDAQ:ATVI). Activision stock remains stuck following a drop that wiped out close to half of the equity’s value.
Moreover, an end to its relationship with Bungie and the stock’s dramatic decline have brought about class action lawsuits against the company.
Signs of optimism have started to appear. However, until this optimism translates into gains, ATVI stock remains dead money.
Negative sentiment dominates Activision stock
Like gaming peers Take-Two (NASDAQ:TTWO) and Electronic Arts (NASDAQ:EA), Activision stock has suffered from a slump in tech stocks that began last fall. Since last October, ATVI has fallen by about 44%. It has traded in a range since early December.
Now, other factors weigh on the stock. In ending its partnership, Bungie will acquire the rights to Destiny. The release of Destiny 2 last fall failed to live up to expectations. That is a possible factor in this breakup. Nonetheless, many blame the plunge in the stock price on this breakup. As a result, attorneys have filed multiple class-action suits. Time will tell how those lawsuits affect Activision stock
The company has also seen a decline in monthly active users (MAUs) on its games. As of the end of the third quarter, MAUs had fallen to 345 million. They had stood at 384 million just one year before.
Although interest in Candy Crush has returned, most of the blame fell on players losing interest in mobile games coming from the King.com division.
After the last earnings report on Nov. 9, I cautioned investors not to buy ATVI just because of the massive plunge. Since that time it has fallen from the $55 per share range to just above $47 per share today.
Where Is the Catalyst?
Now, Wall Street wonders where ATVI will go from here. Activision will report fourth-quarter earnings on Feb. 12 after the market close. Whether this report will show improvements and renew optimism remains unclear.
Still, Amid the bad news has come one glimmer of hope for Activision stock bulls in the form of a low forward price-to-earnings (PE) ratio. The multiple has averaged around 50 over the past five years. However, the falling stock price and increased profits have taken the forward PE ratio to about 18.2.
I would not necessarily interpret this multiple as a buy point. The PE may indicate a possible near-term low. Still, we so far have no event to spur activity in ATVI stock.
The recent releases of Red Dead Redemption 2 and the underwhelming release of Call of Duty: Black Ops 4 have failed to stoke optimism in the equity. Moreover, analysts expect profit growth to pause in 2019, a factor that only dampens investor optimism.
However, Wall Street expects profit growth to return to double-digit levels by 2020. Perhaps at that point, Activision will again grow in value. Still, we need to find out if the low of $43.71 per share that we saw on Dec. 26 becomes the low point of this bear market.
The Bottom Line on Activision Stock
Investors should expect little action from Activision until a catalyst appears. The company has faced a string of disappointments.
Interest has fallen in its mobile games, and the latest Call of Duty release fell short of expectations. Amid a loss of interest in Destiny, the company’s partnership with Bungie ended. Attorneys cited the end of this alliance as a reason for the class action lawsuits Activision now faces.
Bulls in Activision stock can cite the PE ratio that has fallen to multi-year lows. It also remains possible that the low during the Christmas season may signal that the stock has stopped falling.
However, the stock has remained range-bound for almost two months. It will need some impetus to break free. Whether the February earnings report or something else serves as that catalyst, little will happen with ATVI stock until such a stimulant appears.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
