Can Activision Blizzard Rally Into Year End?

Key Points

• Shares have been selling off in recent weeks.
• A fresh earnings beat could spark a recovery rally. 
• The pending deal with Microsoft is a potential risk.

A 12% drop over the past two months might have suggested that investors didn't have high hopes for Activision Blizzard’s (NASDAQ: ATVI) latest earnings report, but it looks like they might have underestimated them. The video game maker which rode the pandemic fuelled wave of gains in 2021, released its Q3 earnings yesterday evening. 

Though they’ve had a rough time of it so far this year, they managed to top analyst expectations on both the topline revenue and bottom line EPS. Considering how weak shares have been in recent weeks, this sets the stage for a recovery rally into the back end of the year. Let’s dive into the numbers and see how strong the business case is for getting long. 

While revenue contracted 14% year on year, it was comfortably above the consensus, with the EPS print coming in a full 35% higher than expected. While a beat of any kind is good given the current market conditions, there were some caveats to this one. For example, operating cash flow dropped 50% year on year, though this was tempered by in-game net bookings which showed growth of more than 13% compared to the same quarter last year.

Microsoft Deal

Speaking to investors after the release, CEO Bobby Kotick said “our games are the result of passion and excellence. This comes from an environment that fosters inspiration, creativity, and an unwavering commitment to developing and supporting our talent. Our employees’ dedication and teamwork are at the heart of an extraordinary workplace that enables the magic embodied in our games.” He also spoke to the company’s planned $69 billion sale to Microsoft (NASDAQ: MSFT) when he said “we look forward to continuing to release epic entertainment in service of our global community of players as a part of Microsoft, one of the world’s most admired companies. We continue to expect that our transaction will close in Microsoft’s current fiscal year ending June 2023."

There are some concerns that the deal might not pass muster with regulators, though it’s too early to ascribe much weight to these reports. In Tuesday’s pre-market session, shares were ticking up from the lows of Monday, which incidentally saw them fall to their lowest levels since January. They’re effectively back trading at 2018 levels, which must be painful for any investors who owned shares when they were trading in the triple digits. For the video game industry to go through record growth in the 4 intervening years while the shares show no benefit must be a bitter pill to swallow. 

Getting Involved

Still, that’s not to say there isn’t an opportunity for those of us on the sidelines who are looking for some exposure to what is still an attractive industry. This is after all the maker of the ever-popular Call of Duty series, with the latest title being released only a few weeks ago to much fanfare. With shares set to open up, there’s an easy entry and exit level on offer for investors to work stops around. The bull’s case is supported by this earnings beat which contrasts nicely with the recent downtrend, and points to at least a short-term recovery rally as the worst-case scenario are avoided. But caution is needed. Quite aside from broader equity weakness that could drag shares down again, this pending deal with Microsoft could yet through some curveballs before it’s finalized. 

For now, investors should treat this as a quick in-and-out opportunity, at least until some of these risks are better accounted for. To the upside, it’s fair to aim for the $80 level as a first target, which would mean a 15% move from where shares closed on Monday. Given the stock’s RSI is right around 30, indicating extremely oversold conditions, it’s not hard to see shares snapping upwards from here if they can get a bit of momentum going this week.