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Can Activision Blizzard's stock rally from earnings-fuelled price collapse?

Activision Blizzard [ATVI] stock dropped as far as 6.1% the day after its Q1 earnings release. With revenue of $1.83bn, it beat earnings guidance of $1.7bn, but came in well below its Q1 2018 figure of $1.97bn. 

The company, which includes Activision Publishing, Blizzard Entertainment, and King Digital Entertainment, saw its stock edge back up at the beginning of this week, but the disappointing earnings combined with drops in many of its games’ monthly active users (MAUs) indicate that all is not well with the makers of popular titles Candy Crush, Call of Duty and Overwatch.Activision Blizzard 1-year share price performance, CMC Markets, 08 May 2019

 

Q4 results were also weak; the company was made to suffer for failing to deliver exciting new releases that match the standards of Overwatch. Meanwhile, competitor title Fortnite, the breakout star of the free-to-play games sector, is eating into the market share of Activision Blizzard’s titles.

 

Investments ahead 

For Activision, 2019 is a year of transition: it’s backing its pre-existing titles while also entertaining a pivot to free-to-play and “battle royale”-style games. Its forthcoming Call of Duty: Mobile – set to debut later this year – will be released on a free-to-play model, while there are unconfirmed rumours that its next-generation console version of the popular franchise, Call of Duty: Black Ops 4, will have a battle royale mode.  

Activision cited Call of Duty, Candy Crush and Overwatch as its principal revenue generators during Q1; all will continue to receive investment, according to CEO Bobby Kotick, who told investors the company will “refocus” on its core franchises.

 

Market cap$35.75bn
PE ratio (TTM)20.47
EPS (TTM)2.28
Return on Equity (TTM)16.44%

Activision Blizzard, Yahoo finance, 08 May 2019

 

One such upcoming investment will be in its Call of Duty esports franchise, which it hopes can emulate Overwatch League (OWL). New franchise teams will be set up in five cities worldwide to compete in a professional league, Kotick revealed during the Q1 earnings call, and there are plans to expand into new markets later this year. 

Activision is investing heavily into mobile gaming, Kotick said, but these projects “will take time” before they hit the market. 

Jefferies analyst Timothy O’Shea, who has Activision stock down as a “top pick”, said: “Everything at Activision seems to be working except Blizzard, which won’t launch a major new game until 2020,” he said. “But with the biggest content pipeline in company history, the lack of new games looks like a short-term problem.”

However, Bernstein analyst Todd Juenger called the company’s earnings report “very alarming”. “The truly alarming news is the ubiquitous, often sharp declines in [monthly active users] and revenue metrics across every franchise, ex-King,” Juenger said.

Blizzard’s monthly active users hit their lowest level since the first quarter of 2016, he continued, and Overwatch faces increased competition from the likes of EA’s Apex Legends. Activision's MAUs fell from 53 million in Q4 2018 to 41 million in Q1 2019. Blizzard's MAUs declined 3 million to 32 million. King gained users, with MAUs up from 268 million to 272 million.

$4million

King's increase in MAUs

 

eSports boom 

Drinks firm AB InBev has been named the official sponsor of Activision’s Overwatch League, and Activision’s potential growth in the esports space will be hotly anticipated by investors. 

Research firm Newzoo estimates that brand investment revenues (such as advertising and sponsorship) will make up 82% of the total industry revenue for 2019. In the earnings call, Kotick cited “substantial” revenue from sponsors as well as from selling the broadcast rights for tournaments.

82%

The proportion of brand investment revenues as a percentage of total industry revenue for 2019

The Overwatch league received 13 million global viewers during its opening week when it opened its second season in February; Activision’s management said total viewership hours of OWL were up more than 30% during Q1. However, Juenger found that statistic potentially “troubling,” since the company has added eight more teams in the past year, meaning viewership per minute is down.

Motley Fool writer Travis Hoium wrote: “One thing that didn't change after the first quarter was guidance for 2019. Management still expects revenue of $6.03 billion and non-GAAP earnings of $1.85 per share. As long as Activision Blizzard can keep hitting its numbers and generating free cash flow, it will be able to bide time before impactful games are released later in 2019 and into 2020.”

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