Does it still pay to play shares of video game maker Activision Blizzard (ATVI)?
The publisher of some of the most well-known game titles in the industry, including Call of Duty and World of Warcraft, is set to report first quarter fiscal 2019 earnings results after the closing bell Thursday. But the shares have been under heavy selling pressure due to multiple slowing video game sales. Video game sales across the industry decline 11% in March to $1.2 billion, leading to a year-over-year decline in the first quarter.
Overall video game spending in Q1 was down 2% year over year to $3.2 billion, according to NPD Group. The decline was driven by a 15% fall in hardware sales and a 11% decline in software. As such, expectations are low for Activision, which has seen its stock price fall 30% over the past year. The company, as with rivals Electronic Arts (EA) and Take-Two Interactive (TTWO), is being pressured by the arrival of Fortnite and its brand of free team-combat multiplayer gameplay, which have leapfrogged traditional console and mobile games Activision relies on.
On Thursday investors will get a sense of not only what the quarter looks like, but also how management feels about the company’s turnaround potential. In the three months that ended March, Wall Street expect Activision to earn 26 cents per share on revenue of $1.25 billion. This compares to the year-ago quarter when earnings came to 38 cents per share on revenue of $1.38 billion. For the full year, earnings are expected to decline 15% to $2.20 per share, while revenue of $6.42 billion would decline 11.6% year over year.
The expected decline in the top- and bottom-line numbers paint a picture of what this year will look like for Activision, which has had a tremendous run over the past five years in terms of both revenue and profit growth. Still, I believe Activision stock could be well-positioned if the management on Thursday can outline plans to reset the business for both multi-platform support and ways to capitalize on the aforementioned games with battle royale modes.
In its acknowledgment that the video landscape is changing, the company has already announced plans to expand platform support with Call of Duty for mobile, which, as of now, is in preregistration. The success of this strategy will dictate how quickly more game titles will shift in that direction. While it will take both time and investments for the Activision to build out the necessary infrastructure needed to support those platforms, it’s tough to ignore how cheap Activision shares have gotten.
The stock is trading with a trailing P/E of about 20.45x last year's earnings, which is almost half of its valuation a year ago. The good news is that the video game market is projected to reach $180.2 billion in 2021, up from roughly $138 billion in 2018. Activision will need to demonstrate it still has a potent combination of strong digital revenues and rising profits margins to make investors believe it can capture a sizable chunk of the video game market.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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