Headquartered in Santa Monica, California, Activision Blizzard (NASDAQ:) is one of the most important interactive software and content developers, holding the keys to some of the biggest video game franchises. After being a darling among investors from 2014 to the last quarter of 2018, ATVI stock has dropped more than 40% from its early October highs.
The group is expected to report quarterly earnings on May 2. So what kind of price performance can we expect from the company around its earnings release? And will ATVI stock ultimately become a strong buy-candidate in the second quarter?
Although I would not bet against ATVI stock’s future, between now and the earnings release date, I expect to see further volatility and possible price weakness in Activision Blizzard stock. Here is why:
Current Headwinds for Activision Blizzard Stock
Increased Competition: The global gaming market has been growing at a rapid rate and is expected to exceed in revenues in 2021. The success of mobile gaming, which accounts for half of the gaming revenue, is one of the most important drivers behind this growth.
Going forward, analysts believe will become a major disruptive force, with a market that will exceed $1 billion this year and with a revenue increase of 26.7% year-over-year. Most of the revenues for the companies in this segment currently come from North America and China.
Such a growth industry inevitably attracts global competition. For example, Fortnite, an apocalyptic survival developed and marketed by the privately held Epic Games, generated in revenue last year, more than any single game in 2018. The free-to-play game has become a worldwide champion among gamers of all ages.
Earnings Season Worries: ATVI is one of the largest gaming companies globally in terms of revenue and market cap. The company has five core divisions:
- Blizzard, which produces franchises such as World of Warcraft and Overwatch and focusing on online PC games with an emphasis on subscription-based business models;
- Activision Blizzard Studios, a television and film studio that produces original content based on ATVI’s existing franchises; and
Activision Blizzard is currently franchise-reliant, whereas competition like Fortnite tends to focus on video game volume. In other words, if ATVI’s core franchises were to lose popularity, the company would face fiscal and market consequences and the stock price would suffer.
When Activision Blizzard reported earnings on Feb. 12, Wall Street was hoping to see the company to dispel fears of Fortnite and other competition. However, the company’s fourth-quarter financial results left some investors raising an eyebrow as the number of monthly active users (MAUs) showed a steady decline in 2018 — a possible sign that Fortnite has indeed been luring away ATVI fans.
While has done well, the Destiny franchise has been underperforming. Finally, Activision Blizzard’s , with a forecasted drop in revenue to $6.3 billion from $7.5 billion in 2018. The company is also decreasing the global headcount by 8%.
Analysts have also been concerned about the impact of several among Activision executives. The industry would rather report the company’s successful franchises and positive player experiences than worries over the managerial void. For example, Activision Blizzard is continuing to bet big on eSports and investors are hoping that a bigger fan base would also translate into larger live events and merchandise sales. However, the numbers to positively affect the bottom line are not there yet.
In short, most investors are likely to wait on the sidelines until they have more have a chance to analyze the balance sheet. Unless the numbers and the rest of the 2019 guidance are exceptional in May, investors may decide not to invest in the stock for several more weeks — or even months.
Short-Term Technical Analysis of ATVI Stock
Despite the broader market rally of 2019 which has pushed the prices of many tech stocks significantly higher, year-to-date, Activision Blizzard stock is up only around 2%. On the other hand, the stock price of Electronic Arts (NASDAQ:), one of ATVI’s main competitors, is up 27% in 2019.
ATVI stock’s 52-week price range has been $84.68 (Oct. 1, 2018)-$39.85 (Feb. 11, 2019) and its 2019 gains have come mostly in March. Therefore, its short-term technical indicators have now become overextended. Investors who pay attention to short-term oscillators should note that ATVI’s technical message has also become “overbought.”
Nonetheless, ATVI’s current price is still under the 200-day moving average, a long-term trend-following technical indicator, which currently is at $53.3. While long-term investors would like to see ATVI stock go over the $50 level, traders are likely to keep the range between $47.50 and $42.50. Ultimately, ATVI’s price will need to stabilize and build a base again before a long-term sustained leg up can occur.
If you already own ATVI stock, you might want to hold your position. However, within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3%-5% below the current price point.
If you are an experienced investor in the options market, you may also consider using a with approximately a six-week time horizon. In that case, you may, for example, buy 100 shares of ATVI at a limit price of $47.17 (the closing price on Apr. 11) and, at the same time, sell a ATVI May 31 $47.5 call option, which currently trades at $2.7.
The $47.50 option is almost at-the-money, offering downside protection in case of volatility and a decline in Activision Blizzard stock. This call option would stop trading on May 31, 2019, and expire on June 1.
After the upcoming earnings call, if you still believe in the bull case for Activision Blizzard stock, then you might consider waiting for a better time to buy, such as when the share price is around the low $40’s, or even high $30’s.
The Bottom Line on ATVI Stock
With its strong franchise focus, Activision Blizzard is an important company that is likely to weather the ebbs and flows of the industry. The rise of the digital gaming revolution is here to stay, and I believe the long-term fundamental story of ATVI stock is still intact.
Investors who are interested in companies in the interactive software, entertainment or communication services but do not want to commit all their capital to a single stock such as ATVI may also consider investing in various exchange-traded funds (ETFs) that have Activision Blizzard as a holding. Examples of such funds would include the Invesco Dynamic Software ETF (NYSEARCA:), the VanEck Vectors Video Gaming and eSports ETF (NYSEARCA:) or the Communication Services Select Sector SPDR (NYSEARCA:XLC).
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.