Activision Blizzard beats the Street, but shares fall on reiteration of guidance
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Activision Blizzard beats the Street, but shares fall on reiteration of guidance

Market-leading games developer and publisher Activision Blizzard reported earnings last week that demonstrated a strong underlying business. The company beat the Street’s expectation on earnings, and its stable of powerful intellectual property looks to be becoming even more powerful, with the latest Call of Duty (released after the quarter had officially ended) looking to be the largest in the franchise’s already impressive history. Despite this, the company’s share price fell – a reflection of the fact that it stuck to its guns on guidance. Investors, clearly, were hoping Activision would deliver a rosier forecast.

The market has reacted strangely to Activision Blizzard’s undoubtedly solid third quarter

graph 1311 activision

Source: Yahoo Finance

First, the earnings themselves. Activision Blizzard beat the Street on earnings, reporting $0.47 for the quarter against analysts’ expectations of $0.44. Its financials were broadly down on last year though: net bookings came in at $1.66 billion against the year ago-quarter’s $1.90 billion. Net revenues (on a GAAP basis) came in at $1.51 billion against $1.62 billion in the third quarter of 2017. Investors aren’t likely to be phased by this, though. Here’s why:

In the third quarter of 2017, Activision Blizzard was riding the success of Destiny 2’s release. The big game this time around is the latest Call of Duty – but, being released after the end of the third quarter, it’s not included in these figures. When you take that factor into account, it’s quite clear that Activision Blizzard is operating on some very solid fundamentals that are not leaving it reliant on blockbuster new releases.

It’s pretty clear what those fundamentals are. The company had 345 million monthly active users over the third quarter, and (for the first nine months of the year) has delivered a record number of in-game bookings ($3 billion). Or, put more simply: gamers are flocking to Activision’s titles in droves, and the company is seeing record success in making in-game, digital, sales. This trend towards digital downloads is a major disruptor for the industry, and Activision Blizzard is out-in-front of competitors (the same could be said about its eSports division).

The company’s CEO, Bobby Kotick, spoke to the strength of these results in the company’s press release, saying: “Activision Blizzard’s results for Q3 exceeded our prior outlook as we continue to entertain large audiences, drive deep engagement, and attract significant audience investment across our franchises. Our unique advantage continues to be our ability to create the most compelling interactive and spectator entertainment based on our own franchises, combined with our direct digital connection to hundreds of millions of customers, in over 190 countries. With these competitive advantages we continue to connect and engage the world through epic entertainment.”

Despite all this, investors sent the company’s share price down for what looks like one reason: Activision Blizzard stuck to its guidance, rather than raised it. With the latest Call of Duty selling well, and the strong fundamentals displayed over the three months ended September, it might be understandable – but it still looks like an overreaction. Mind you, that seems to be the case with many stocks this earnings season. In these cases, investors should take solace in the fact that the long-term story hasn’t changed.

Disclosure
Dominion holds Activision Blizzard in its Global Trends Ecommerce Fund.


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