Sometimes Wall Street and investors alike are left scratching their heads when a stock falls. In the case of video game giant Activision Blizzard (NASDAQ: ATVI)
, their Q3 results were nothing short of stellar
but still shares fell after they were released yesterday. Both topline and bottom-line numbers beat expectations, with revenue up more than 46% year on year. Shares had been trading mostly sideways for the past two months so it’s not like they had been overhyped and run up into the release but they still found themselves down 1.5% on the day.
If most of Wall Street was unsure as to the lackluster response, you can be sure Activision management was feeling the same. Indeed, they had gone so far as to raise their full-year outlook as part of the earnings release, an uber bullish sign that usually fuels a fresh rally. But still there was no uptick on the day.
Huge Growth Ahead
CEO Bobby Kotick still struck a positive tone when he said “our teams continue to execute our growth plans with excellence during incredibly challenging circumstances. We are on a path to deliver sustained long-term growth across our fully-owned franchises. With confidence in our ability to continue to execute, we are raising our outlook for the year and remain enthusiastic for our growth prospects next year.”
But as we head into the final trading day of the month, shares are down another 1% in pre-market trading and look set to test September’s lows.
There were some fingers pointed at the company’s cash flow which was lower than expected, both operating and free cash flow were down 37% on the year. In tandem with that and despite the jump in bookings, overall user numbers were down. However, these are likely to be temporary blips in what is otherwise a burning success story of 2020. Activision, and other video game names like Take-Two Interactive (NASDAQ: TTWO), have capitalized on the opportunity presented by COVID-19. With more people than ever before confined to their houses, video game sales have gone through the roof and set consistent monthly records since March. September alone saw overall saws jump 10% on last year, with gains seen across the core segments of hardware, mobile, and accessories.
Strong Bullish Sentiment
While Thursday’s results continue to be digested, Activision investors know they have plenty of heavyweights in their corner to help put their mind at ease. Two weeks ago, Deutsche Bank were out with an upgrade to shares, moving them to a Buy and upping their price target to $90. From Thursday’s closing price this still suggests the guts of 20% upside and new investors have the added bonus of Q3’s solid numbers behind them too.
Around the same time Piper Sandler reiterated their Overweight rating and price target of $98 on the stock, coming out particularly bullish on the company’s Call of Duty franchise and its market penetration. Also this month, Stifel were out with a $102 price target on Activision shares while KeyBanc pinned $96 on them.
With 46% year on year growth in revenue and analyst expectations smashed pretty much across the board, the lack of an immediate uptick in shares has to be seen as a gift of a buying opportunity. The general consensus seems to be for shares to hit the mid $90s range which put them above August’s peak and at fresh all time highs. Unless these sell-side bulls are out with negative reconsiderations to their ratings and price targets in the coming weeks, there’s every reason to think Activision shares will be in a firm uptrend by Thanksgiving.
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7 Stocks That Will Help You Forget About the Fed
Normally when the Federal Reserve (i.e. the Fed) makes an announcement, the market reacts predictably. That’s due, in large part, to the nature of what the Fed normally announces. Will interest rates go up, down, or remain unchanged? And for their part, the markets have a pretty good idea what the Fed will do before they do it.
But the Fed’s announcement of August 26 was a little different. They talked briefly about interest rates (they’re staying really low for a long time). But they were more concerned about inflation. Well, the Fed is always concerned about inflation, but this time they really mean it. Basic economics says that low-interest rates should spur inflation.
However, the market has been defying conventional wisdom and the Fed is not getting the inflation they want. So the Fed has basically said that they’re letting inflation go rogue. If it goes above their target 2% rate, so be it. The Fed is done trying to hit a target.
At first, the markets cheered the news. Not only was the Fed not taking away the punch bowl, but they were also going to keep the low rate liquidity going for a long time!
But after a little while to digest things, investors are realizing they have to be grown-ups about this. And now investors are considering how to rebalance their portfolios for the remainder of 2020.
I don’t know about them, but if I were you I would target companies that have a high free cash flow (FCF). Whether it’s your personal finances or in evaluating a stock, cash flow is your friend.
When a corporation has high FCF, they have more strong growth in good markets and more flexibility during when the economy is weaker.
As institutional investors come back into the market, it’s time for you to reposition your portfolio for whatever comes next.
View the "7 Stocks That Will Help You Forget About the Fed".