Activision's Disappointing Quarter Only a Temporary Setback for the Game Maker

On Feb. 11, video game maker Activision Blizzard (ATVI) released less-than-stellar earnings for the fourth quarter of 2015, causing investors to panic. In the wake of last week's sell-off, does the company still have strong growth potential? Or is Activision now a dangerous stock?

The evidence suggests that Activision has good prospects because of forthcoming new releases of games and the acquisition of King Digital Entertainment (KING) . The purchase of the the South Korean games manufacturer will add to its product pipeline. King is the developer of the hit Candy Crush. Activision also has a sound strategy to increase its number of online users. 

Activision Blizzard is the world's fifth largest video gaming company by revenue, with a market cap of $21.55 billion. The Santa Monica, Calif.-based company is the publisher of such popular multimillion-dollar game franchises as Warcraft and Call of Duty. Along with Microsoft and Electronic Arts , Activision is one of only three video game-related companies on the S&P 500, having joined last August.

But the holiday quarter proved challenging for the game publisher. Adjusted profit fell from 94 cents a share in the fourth quarter of 2014 to 83 cents a share. The company had forecast a profit of 82 cents, but the analyst consensus had expected 86 cents a share. This marked the first time in five years that the company had missed on analyst forecasts for per-share profits.

Adjusted revenue fell 4%, to $2.12 billion, underperforming Activision's expectations of a flat $2.15 billion. This was despite a roster of blockbuster holiday releases, including a new Call of Duty game. As with toymakers, the holiday season is a do-or-die period for video game publishers. Stagnant or weak sales do not bode well. Another disappointment from the earnings call was news that Activision would be postponing the release of a hotly anticipated sequel to its game Destiny until 2017.

Shares of Activision plummeted last Friday after the announcement to the worst single-day sell-off since 2014. The stock, which had nearly doubled in 2015, is now hovering below $30 per share. Activision is more than 26% below its 52-week high of $39.93 on Dec. 30. Later last week, word leaked that the company would be starting a wave of employee layoffs.

Activision started looking like a bad bet.

Still, it's not time to give up on the company. The good news outweighs the bad and Activision should experience a profitable 2016.

ATVI Chart ATVI data by YCharts

There are plenty of exciting game releases slated, including expansions for Call of Duty 3 and World of Warcraft, as well as the launch of a new franchise, Overwatch, and the release of a Warcraft movie in June.

In addition, Activision will be completing its acquisition of King Digital Entertainment, the South Korean developer of the breakaway smash hit Candy Crush. The deal, which recently won approval from South Korean regulators, is worth $5.9 billion.

One of the drivers for weaker-than-anticipated revenue at Activision was stagnant sales of the company's "casual" games Guitar Hero Live and Skylanders SuperChargers. The customers who would once log into their consoles to play these titles tend to be less involved in video games than "hardcore" gamers who purchase and favor franchises such as Call of Duty, and they're switching to mobile games at an alarming pace.

Activision's acquisition of King Digital should prove a boon here, as the Asian game publisher has created some of the world's most popular mobile games. In purchasing King Digital, Activision will also expand its base of monthly active mobile game users from 80 million to 500 million.

Activision is anticipating a good year, with adjusted revenue of $6.25 billion and pre-share profits of $1.75. In addition, the company has announced that it's raising its dividend by 13%. By expanding its focus to encompass more online users, and by offering up an exciting roster of new titles, there's no reason Activision won't be able to meet this challenge. Shares look attractive at these fire-sale prices.

As you can see, Activision looks like a good bet for investors right now. On the flip side, this group of 29 dangerous stocks is a terrible place for your money today. In fact, using a little-known financial "health test," the stocks on this list are a failure in every category! Click here now to make sure you don't make the mistake of owning one.

 

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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