Activision Stock Down 15% in November – Time to Buy ATVI Stock?

The price of Activision stock is down 15% so far in November following some disappointing forward guidance, delays in the release of key titles, and workplace-related issues that may lead to the resignation of some of the company’s top developers.

On 3 November, shares of the developer of World of Warcraft took a beating as they declined 14% after the company revealed its financial results covering the third quarter of the year.

This pronounced drop was attributed to below-expected guidance for the fourth quarter of the year while the management also announced that it was delaying the release of two key titles – Overwatch 2 and Diablo IV.

Meanwhile, Activision stock dropped more than 6% yesterday after an investigation from the Wall Street Journal found that the company’s Chief Executive Officer Bobby Kotick was aware of the sexual abuse claims and hostile work conditions that women within the firm have allegedly suffered but he ignored them or at least failed to address them.

Only a few hours after, the Board of Directors of Activision Blizzard released a statement in which they qualified the Journal’s remarks about Kotick’s response to the allegations as “misleading” while they backed the CEO by stating that they remained confident that he addressed these issues appropriately once they were brought to his attention.

More than 100 employees from ATVI gathered outside the offices of Blizzard in California after the Journal’s report came out to demand Kotick’s resignation as the situation keeps heating up.

Market participants seem to be concerned that the firm could succumb to sizable legal expenses if these allegations are brought to court, especially now that there might be evidence that the leadership team was aware of the situation and failed to respond appropriately.

With this in mind, what does the future hold for ATVI stock? In this article, I’ll take a look at the price action and fundamentals of Activision to possibly answer that question.

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Activision Stock – Technical Analysis

Earlier this month when I covered Activision’s post-earnings drop, I pointed to the $66 support area as a short-term line in the sand for the stock and this level has held steady during the 3 November drop and yesterday as well.

Trading volumes during these two prominent down days have been quite elevated with a total of 38 million shares exchanging hands yesterday – a figure that exceeded the daily average by more than 3 times.

As a result of these declines, the stock is now trading 10% below its 20-day simple moving average while momentum indicators have dived to lower lows.

In this regard, the Relative Strength Index (RSI) remains near oversold levels at 33.5 while the MACD is neck-deep into negative territory and still relatively distant from the signal line.

At this point, the negative momentum prompted by this latest article from the Journal, the looming possibility that its CEO could resign, and the potential resignation of top developers within the firm are some of the factors that favor a bearish outlook for Activision stock.

If the $66 level is broken, the next horizontal support would be found at $62 for a 6% short-term downside risk. That said, if that threshold fails to hold, the situation could get much worse and shares could rapidly decline to the low 50s.

Activision Stock – Fundamental Analysis

There are many factors that could affect the performance of Activision in the near future from a fundamental perspective including elevated legal expenses if the company were to face a class-action lawsuit amid these sexual abuse allegations.

Moreover, the resignation of top employees could further delay the release of key titles and major updates. Additionally, if Kotick is forced to resign, the company may face a tough road ahead as leadership changes tend to affect the mid-term performance of businesses.

All things considered, the extent of the impact of the current events on Activision Blizzard’s financial performance is still unclear and that creates room for further weakness in the valuation.

At the moment, Activision is trading at 18 times its forecasted earnings per share for the next 12 months while its EV/EBITDA is standing at 13 compared to an average multiple of 25 displayed by the entertainment software sector.

The company has a long-term debt of $3.6 billion, cash reserves of around $10 billion, and generates over $2 billion in cash flows every year.

Overall, Activision stock seems attractive at these levels but the margin of safety remains relatively small. Moving forward, further declines caused by the current headwinds may provide an even more attractive entry price for long-term investors, possibly eyeing the low 50s as a target for taking a long position in ATVI stock with the hopes that the company will emerge from the current scenario relatively unscathed.

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