Activision Blizzard (NASDAQ:ATVI) beat on both earnings and revenue in its latest report. However, ATVI stock fell as the company issued lower guidance and revealed a falling number of monthly active users (MAUs). This accelerated a downtrend that has been plaguing ATVI stock since early October.
Since October 3, the gaming company has fallen to a much lower valuation. And after a double-beat quarter, many investors will wonder if the time has come to purchase ATVI stock. Given the negative momentum and falling MAUs, however, investors should probably hold out for a lower entry points.
Lower Guidance Defined Earnings Report
In Q3, Activision Blizzard reported non-GAAP EPS of 52 cents. Wall Street had expected an EPS of 50 cents. This also represents a drop from the same quarter last year when the company earned 60 cents per share. Also, revenues of $1.66 billion met expectations but did represent a drop of 12.6% for the same quarter last year.
Unfortunately for holders of ATVI stock, forward guidance fell below estimates. Activision projects an adjusted EPS of $1.27 for the Q4, coming in at the lower end of the expected range. The company anticipates revenue of $3.05 billion, falling short of previous estimates which forecast revenues of $3.06 billion.
Even worse, MAUs fell to 345 million. This dropped from 352 million in the previous quarter. It also means a third consecutive quarterly decline in MAUs. Many blame this on the lackluster launch of Call of Duty: Black Ops 4. However, competition from its long-time rivals Take-Two Interactive (NASDAQ:TTWO) and Electronic Arts (NASDAQ:EA) shouldn’t be ignored. Nor should Epic Games, a privately-held gaming firm, that makes the massively popular Fortnite. Experts also mention the popularity of PlayerUnknown’s Battlegrounds, a game created by South Korea-based Bluehole.
Whatever the reason, this earnings news sent ATVI stock plunging in morning trading. Activision stock is down 11% from yesterday’s close. This also means the stock has lost around one-third of its value since hitting a 52-week high of $84.28 per share on October 1st. With this drop, Activision stock also now trades below levels seen this time last year.
Investors Should Still Wait to Buy ATVI stock
This also takes ATVI’s forward P/E ratio to about 22. That comes in below the ATVI’s five-year average PE of almost 49. Still, investors must ask whether that translates into a profitable buy point. While some might interpret this drop as a discount, ATVI stock flirted with a single-digit P/E ratio as late as 2012.
Conditions have improved since 2012, so I do not expect ATVI to drop to a single-digit multiple. That said, with the lower guidance, annual profit growth will fall into the single-digits for this year. While Wall Street expects the company to resume double-digit growth in future years, this indicates the stock could have further to fall. Prospective buyers should also not forget that stocks at 52-week lows tend to keep forming new lows.
Despite these setbacks, I think this company’s franchises will remain popular. Moreover, with the Overwatch League gaining in popularity, I still see ATVI as a solid, long-term play. However, until a catalyst appears to resume the stock’s move higher, investors should stay away.
Final thoughts on ATVI stock
Despite a massive plunge, investors should wait to buy ATVI stock until a later time. Lower guidance and falling MAUs overshadowed the company’s earnings and revenues beats. This has taken ATVI’s P/E ratio to below half of its normal averages.
It also means that finding the right time to buy hinges on avoiding getting caught in the downtrend. While the multiple remains relatively low, it still comes in higher than many historical lows. Hence, ATVI stock may not have seen its last, near-term plunge.
With Activision’s gaming franchises and its role in the Overwatch League, I see Activision stock as a profitable long-term bet. However, without a positive catalyst, the stock will likely continue to lose value for now.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.