Video game maker Activision Blizzard (ATVI) is set to report fourth quarter fiscal 2018 earnings results after the closing bell Tuesday. The shares have been under heavy selling pressure due to multiple setbacks from holiday season sales.
The publisher of some of the most well-known game titles in the industry, including Call of Duty and World of Warcraft, has seen its stock price nearly halved since reaching its 52-week high in October. Investors are now hoping for “less bad” earnings results, given the weak numbers and disappointing guidance recently released from rivals Electronic Arts (EA) and Take-Two Interactive (TTWO).
In other words, on Tuesday it’s “game on” for Activision, which established a strong leadership position when it comes to record-breaking hits. It will need to demonstrate it still has a potent combination of strong digital revenues and rising profits margins. What’s more, with the video game market is projected to reach $180.2 billion in 2021, up from roughly $138 billion in 2018, Activision must guide in a way that suggests it expects to capture a sizable chunk of that market.
If it can do that, the stock — still down 48% from its 52-week high — should rebound strongly.
In the three months that ended December, Wall Street expect Activision to earn $1.29 per share on revenue of $3.04 billion. This compares to the year-ago quarter when earnings came to 94 cents per share on revenue of $2.64 billion. For the full year, earnings are expected to rise 14% year over year to $2.60 per share, while full-year revenue of $7.48 billion would rise 4.2% year over year.
Thanks to the arrival of Fortnite and its brand of free team-combat multiplayer gameplay, the video game landscape is changing. This has forced the titan publishers like Activision, which experienced a decline in audience size, to shift their strategy. The company reported Q3 audience size of 345 million engaged users, which was down from 352 million in Q2. Not only was this the fourth consecutive quarter of declines, it underscored the growing threat of Fortnite.
On the positive side, Activision, which released Call of Duty: Black Ops 4 on October 14th, announced that this was the company’s best-ever single day of digital sales. On Tuesday Wall Street will want some evidence that the game maintained its popularity for the duration of the holiday shopping period.
Investors, meanwhile, will want the management to outline its plans to re-energize its audience base, increase engagement and get revenues growing again, particularly for in-game spending.
Elsewhere, strong digital revenues and rising profits margins will also be an area of focus for analysts. From a valuation perspective, however, it’s tough to ignore how cheap Activision shares have gotten. The company must nonetheless demonstrate that it can meet or surpass fiscal 2019 revenue estimates of $7.35 billion and earnings estimates of $2.61 per share. If it can guide in that manner, the stock should command a higher valuation.