Shares of video game maker Activision Blizzard (ATVI) have been under heavy selling pressure over the past thirty days, falling almost 20% since the company released its new mobile game, Diablo Immortal during BlizzCon 2018 — its biggest event of the year.
Publisher of some of the most well-known game titles in the industry, including Call of Duty, World of Warcraft, and mobile games from King Digital, Activision has established a strong leadership position when it comes to record-breaking hits. Diehard PC gamers, however, made it known that Diablo Immortal — despite stemming from a strong gaming franchise — was not what they expected.
Activision is set to report third quarter fiscal 2018 earnings results after the closing bell Thursday. Mobile games have become the company’s most profitable business in recent quarters. So it makes sense for the management to move in that direction, which raises the question: Is the recent decline in the stock justified? On Thursday analysts will also focus on the extent Activision can continue to grow its subscriber and licensing numbers, while issuing bullish forecast, which could quickly reverse the decline.
In the three months that ended September, Wall Street expect Activision to earn 50 cents per share on revenue of $1.66 billion. This compares to the year-ago quarter when earnings came to 60 cents per share on revenue of $1.9 billion. For the full year, ending October, earnings are expected to be $2.01 per share, down from $2.20 a year ago, while full-year revenue of $6.54 billion would decline about 1% year over year.
Strong digital revenues and rising profits margins will also be an area of focus for analysts. The company has made it known that Call of Duty, Candy Crush, World of Warcraft, and Overwatch franchises, together, makes up not just two-thirds of its revenue, but also accounts for the lion's share of profits. And with the annual release of Call of Duty relied upon to lift both the top and bottom lines, this puts increased importance on the ongoing performance of it latest installment, Call of Duty: Black Ops 4.
In the second quarter, Activision reported earnings of 52 cents per share, crushing Wall Street estimates by 20 cents. The company ended the quarter with 352 million monthly active users (MAU), made up by 45 million in Activision, 37 million in Blizzard and 270 million in King. There has been concern that MAU have been on the decline for the past couple of quarter. Here too, analysts will hone in to learn whether Call of Duty: Black Ops 4 help stem that weakness.
From a valuation perspective, however, it’s tough to ignore how cheap these shares — which now trade some 25% below their 52-week high — have gotten. The company must nonetheless demonstrate that not only can it sustain its earnings and revenue growth trends for this year, but also that it has enough pricing power to meet next year’s profit estimates and command a higher valuation.