Will Activision Earnings Free It From Under Fortnite’s Thumb?

Stocks to sell

Activision Blizzard (NASDAQ:ATVI) is due to report its fourth-quarter results today after the bell, and sentiment surrounding ATVI stock is lower. Going into the announcement, Activision shares have lost roughly 15% over the past five trading days. The firm’s Q4 results are likely to reflect the challenges ATVI faced in 2018, and most expect the game-maker will offer up more of the same throughout 2019. 

But how Activision stock performs after earnings depends on a number of key factors. There will be several items investors will be watching for, which include the following:

Layoffs: The number one thing investors will be watching for when Activision Blizzard announces will be details regarding reported layoffs that the firm is planning for the coming year. Bloomberg reported that ATVI will announce plans for hundreds of layoffs during its fourth-quarter earnings call. The job cuts are likely part of a larger restructuring initiative that Activision is carrying out to offset sluggish sales and tightening finances. As of Tuesday morning, the rumored layoffs hadn’t been confirmed or denied by Activision, but the earnings call is likely to confirm Bloomberg’s report.

Difficult Environment: Shares of Activision Blizzard stock were also hurt by the lackluster results of its peers — Electronic Arts (NASDAQ:EA) and Take-Two Interactive (NASDAQ:TTWO). Both gaming companies released their own results earlier this month, disappointing the market and taking share prices across the industry lower. The gaming sector appears to be in the middle of a shift as players’ attention has been pulled away from some of the most popular franchises by free-to-play games like Fortnite. The growing popularity of Fortnite among the gaming community has been a major blow to ATVI because it directly competes with the firm’s Call of Duty franchise. 

Fortnite: Speaking of which, number two on investors’ watchlist for Activision Blizzard’s Q4 results is how the company is dealing with competition from Fortnite. If ATVI fails to meet its guidance, traders will almost certainly blame Fortnite, and management needs to have an answer to the rising competition from the game. Initially, the firm said competition from Fortnite was minimal, and that the game was actually helping the industry overall by bringing on new players. However, its rising popularity has become a concern — not only because players may abandon franchises like Call of Duty, but also because it underscores how fickle gamers can be. If Fortnite can disrupt an industry so quickly, who’s to say there won’t be another bombshell to be dropped in the coming years.

Guitar Hero Refund: Another issue on investors minds will be Activision’s plans to refund Guitar Hero customers as it eliminates Guitar Hero Live. In February the company started to refund customers who purchased Guitar Hero Live between Dec. 1, 2017 and Jan. 1, 2019. Clearly management believes that repaying customers who purchased the streaming service will be less expensive than continuing to run it, but traders will want to know exactly how this will impact ATVI’s finances in the year ahead. 

Engagement: Along the same lines, traders will be keen to see how engagement fared in the fourth quarter for ATVI. In previous quarters months active users were declining, so that figure will be in focus again when the Q4 results come out. If management hasn’t been able to turn things around and increase engagement, you can expect Activision stock to lose some ground. 

Esports: A bright spot for ATVI stock is likely to be the company’s Overwatch esports league. Not only has Overwatch been wildly popular, but the esports sector looks poised to continue growing exponentially. Some even believe that the genre will eventually grow to become a part of America’s collegiate sports. So far, the growth runway for esports games looks impressive and as long as Overwatch is able to continue drawing in new users and holding on to players, it could be a growth engine for ATVI stock.

Bottom Line on ATVI Stock

With ATVI stock down in the dumps ahead of Tuesday’s release, some investors might be tempted to pick up the game-maker. However, I’d hold off, as the Q4 results are unlikely to surprise in a good way.

Activision is currently suffering from depressed demand, tough competition and strained financials. The Q4 earnings call is likely to confirm that the entire industry is suffering right now.

More layoffs than expected coupled with poor engagement data could take ATVI stock even lower following the results. I’d wait to buy Activision stock until management is able to lay out a clear plan to get the company back on track and deal with threats like Fortnite.

As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.

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