Activision Blizzard (NASDAQ:ATVI) stock declined over 2% in after-hours trading Tuesday. Honestly, I have no idea why.
It’s possible ATVI stock just needed a breather. At the close of regular trading, shares rallied 66% since Mar. 20. That included a 7% gain in just five sessions ahead of Tuesday afternoon’s earnings report.
Still, that earnings report was spectacular. Activision Blizzard’s results crushed analyst estimates. A raised full-year outlook too was well above expectations.
It’s not just that Activision Blizzard beat estimates, either. It’s how the company delivered the beat.
And so Q2 isn’t just about near-term gains. It’s about the attractive long-term case for ATVI stock.
The Headline Numbers
Again, earnings were spectacular. Adjusted revenue, which adds back deferred revenue, increased a whopping 71% year-over-year. Adjusted earnings-per-share (including deferrals) came in at 97 cents against just 38 cents the year before.
Both figures crushed Street expectations. Analyst consensus predicted 69 cents in adjusted EPS, and 41% adjusted revenue growth.
The outlook is strong as well. After Q1, Activision Blizzard expected $6.9 billion in adjusted revenue this year. Guidance now is for $7.62 billion. The EPS projection went from $2.60 to $3.05.
There are two important things to note relative to that guidance. First, Activision Blizzard has a long history of guiding conservatively. That history strongly suggests that actual full-year results will come in well ahead of even the updated guidance.
Second, the full-year outlook obviously includes the benefit of Q2 numbers that came in well above Activision Blizzard’s own projections for the quarter. But the beat this quarter doesn’t explain the entirety of the hike. In fact, implied guidance for the second half of the year was increased by roughly 10% in terms of both adjusted revenue and adjusted profit.
And so the good news from Q2 doesn’t just come down to Q2. The guidance hike suggests that business in the third and fourth quarters too will be better than Activision’s management team thought just three months ago.
A Closer Look
But the quarter also supports a bull case that goes beyond performance this year.
One of the reasons I’ve been bullish on ATVI stock is the company’s potential user growth. As I’ve noted before, chief executive officer Bobby Kotick said last year that Activision Blizzard could move from 350 million users to 1 billion by 2024.
The company is moving toward that goal. Monthly active users in Q2 were 428 million, up more than 20% from last year’s mark. It’s a strong step in the right direction.
Obviously, the novel coronavirus pandemic was a factor. But the users acquired in April or May 2020 aren’t going to disappear in a matter of months.
Many, if not most, of those users are going to stick around for years to come. And if Activision Blizzard can get to that 1 billion target — and it’s off to a good start — that can drive profit growth and upside in the stock.
Meanwhile, Call of Duty had a big quarter for its Warzone “battle royale” game. Activision has been slow to find a rival to Epic Games’ remarkably successful Fortnite, but Warzone’s performance in Q2 suggests CoD finally has found a winning formula. In-game bookings for the franchise, a key driver of long-term growth, increased roughly 400% year-over-year.
Finally, the bear case for ATVI stock long has focused on the supposedly inevitable demise of World of Warcraft. But that pioneering game from Blizzard keeps defying the skeptics — and it apparently grew nicely in Q2 as well.
The Long-Term Case for ATVI Stock
It’s the sum of this good news that makes the after-hours selloff so puzzling. Again, it’s not just the headline beat, but the nature of the beat that should drive optimism.
The full-year outlook has improved. Users are growing. And like Zoom Video Communications (NASDAQ:ZM) or Sea Limited (NYSE:SE) or other pandemic winners, that user growth suggests improved results well beyond 2020.
The core franchises, most notably CoD and WoW, are performing well. We even saw strong reports from rivals Electronic Arts (NASDAQ:EA) last week and Take-Two Interactive (NASDAQ:TTWO) on Monday. Clearly, the industry is healthy, and new console launches from Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) provide more reason for optimism going forward.
It’s true that ATVI stock rallied into earnings, and perhaps Tuesday’s trading is a bit of a “sell the news” response. But the news here is too good to sell. Activision Blizzard’s stock should resume its rally in short order.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.