Activision Stock Down 10% Today – Time to Buy ATVI Stock

The price of Activision stock is down 10% today in pre-market stock trading action following the release of the firm’s financial results covering the third quarter of 2021 amid weaker-than-expected guidance for both the fourth quarter and the full 2021 fiscal year and other negative announcements.

Revenues of the Santa Monica-based video game developer landed at $2.07 billion during the three months ended on 30 September resulting in a 6.2% year-on-year jump primarily as a result of the strong performance of Blizzard – the unit that owns the World of Warcraft and Diablo franchises, among others. Analysts had forecasted sales of $1.88 billion for the period.

The 20% year-on-year advance in Blizzard’s top-line results helped offset the 17% decline experienced by Activision’s revenues – the segment that includes sales of Call of Duty, a popular eSports title.

Meanwhile, sales in the Americas – the most important regional segment for Activision – advanced a mild 3% in these past three months but this poor performance was partially offset by strong gains in the Asia Pacific region as sales surged 20% there to end the period at $285 million.

Non-GAAP earnings per share for Activision Blizzard landed at $0.89 in the third quarter of 2021 compared to the $0.78 per share the company reported a year ago while they exceeded analysts’ estimates for the quarter by 27% as per data compiled by Capital IQ.

However, the management’s guidance for both revenues and earnings for the upcoming fourth quarter and for the full 2021 fiscal year came in below the market’s expectations and that is contributing to today’s decline in the stock price.

Moreover, the management stated that it will be delaying the launch of two long-awaited titles – Overwatch 2 and Diablo IV.

Is Activision stock poised to keep dropping in the future following the release of this important quarterly report? In this article, I’ll attempt to answer this question by assessing the price action and fundamentals of this video game developer.

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Activision Stock – Technical Analysis

Controversies about its workplace environment including allegations of gender inequality and sexual harassment have contributed to pushing the price of Activision stock down this year with year-to-date losses amounting to 16.4% so far in 2021 excluding today’s sharp pre-market drop.

Meanwhile, a seemingly fading pandemic tailwind, the possibility that important titles may experience delays in their updates and new releases in the future amid internal discomforts, and weaker-than-expected numbers for the upcoming quarters have submerged the stock in a pronounced downtrend that seems to be accelerating after yesterday’s earnings release.

Even though the price had been recovering some lost territory lately, a failed jump above the stock’s short-term moving averages highlighted weakness in the near-term outlook while today’s post-earnings downtick is favoring a bearish outlook for the next few weeks.

For now, this drop will plunge the price of ATVI stock well below its long-term and short-term simple moving averages and it will push it near a couple of horizontal supports found at the $66 and $62 levels. Trading volumes were particularly high yesterday during a session that saw the stock dropping more than 2%.

It is highly likely that today’s drop will lead to further weakness in the price in the next few days and it may take a while for Activision to recover from this strong blow considering that the company is experiencing relevant setbacks on the fundamental front.

Activision Stock – Fundamental Analysis

The pandemic helped Activision in recovering from the hiccup it experienced back in 2019 when the company saw its sales drop by nearly 14% amid weak booking volumes for many of its top titles.

Last year, sales jumped to $8.09 billion for a 25% increase compared to 2019 while the management is now anticipating a 7% jump for this 2021 fiscal year. This performance is not necessarily bad considering the tough comps that the firm is measuring its top-line results against.

Meanwhile, Activision’s track record in terms of its bottom-line profitability is not at all bad either as GAAP earnings per share have grown from $1.28 back in 2016 to $2.82 per share last year at a compounded annual growth rate of 22%.

For this year, GAAP EPS is expected to land at $3.3 per share resulting in a 17% year-on-year jump.

Even though it is true that Activision is facing some important issues concerning its management’s capacity to meet deadlines for some major titles along with the disruptions caused by the latest workplace-related controversies, it is also true that this 10% decline is pushing its valuation to attractive levels.

If this morning’s pre-market decline spills over to the live session, chances are that Activision’s forward P/E multiple will land at around 18x. Meanwhile, if that weakness endures for longer, chances are that the stock could trade at even lower multiples in the near future.

Considering the company’s robust balance sheet, strong brand and titles, its positive historical earnings growth, and the positive trends the gaming sector is experiencing as a whole, a P/E multiple below 18 would offer quite an attractive entry point for long term investors willing to stomach some short-term pains in exchange for some potentially attractive mid-term to long-term gains once the company manages to get out of these troubled waters.

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