Usually, a solid earnings beat
across the board would be enough to send a stock rallying higher, but not so for Activision Blizzard (NASDAQ: ATVI)
. The video game-making giant comfortably beat what analysts had been expecting for their Q2 earnings last month, but their shares are still trading below where they were on the day of the release.
To be fair, there had been an initial pop of upwards of 8%
in the week following the report, but there was little conviction in it and all in all, it’s been a fairly slow August and September for shares. However, there are fundamental and technical factors starting to align that suggest the stock is ready to wake up and rally into Q4. Let’s take a look at some of them here.
Starting with the most recent earnings report, not only did Activision’s management beat the consensus for the topline and bottom line figures, but they went so far as to raise their outlook for the year. This kind of a move is often seen as one of the most bullish signals a company can give to investors and bodes well for the continuation of their track record for beating quarterly earnings estimates. The bullishness from management went a long way towards undoing any remaining uncertainty following the state of California’s decision to sue the company over poor workplace conditions and culture, as well as the crackdown by Chinese authorities on the country’s video game habits.
The folks over at Baird weren’t afraid to reiterate their Outperform rating on the stock following the fresh numbers and noted that while “it’s been a rough few weeks”, the underlying trends for the industry are strong and should continue to support growth. UBS raised their Q3 estimates as well as their full-year bookings estimates following August’s report, adding in a note to clients that “while we expect costs to be elevated in Q3 given investments in product teams, compliance, employee relations, sales and marketing, this will help unlock the full potential of its studios and franchises heading into next year". Their $120 price suggests there’s upside of around 50% to be had from Friday’s closing price of $80, and the sluggish performance seen in shares over the past month is starting to look like a seriously good buying opportunity.
Investors thinking about getting involved also have Citi in their corner. Around this time last month they moved Activision shares up to a Buy rating after looking at the bull, bear, and base case before deciding "current concerns about Blizzard's execution and China regulatory risk are more than priced into Activision’s equity at current levels." Citi’s $105 price target mightn’t be as lofty as their peers in UBS, but it reinforces the prevailing sentiment that shares are chronically underpriced right now.
Following on with this bullish trend from the sell-side heavyweights, Morgan Stanley pulled Activision into their list of “top ideas” at the end of August. They called themselves “aggressive buyers” at current prices, and said they were forecasting returns of at least 45%. Considering Activision shares have gone on to dribble 5% lower in the two weeks since those of us looking to pre-emptively prepare our portfolios for a strong Q4 could do worse than open up a position around here.
Shares are bouncing off support from their pre-earnings low, as well as the price range that the bears failed to break below for much of last year. The stock’s RSI is starting to move out of the 30s, while the MACD is in a steady uptrend too, suggesting the stock is starting to shake off its slumber. To be sure, some strategic headwinds remain but there’s a strong argument to be made that the worst case scenarios are already priced into shares and the tailwinds from both the company’s performance and industry’s strength should easily win the day. On the latter point, the most recent video game industry sales numbers are up once again on a year-over-year basis, and hit a record $4.6 billion in July. The COVID pandemic might have accelerated the industry’s growth by a couple of years, but these latest numbers suggest that the growth is going to continue compounding. As the maker of some of the world’s most popular video games, e.g. Call Of Duty, Activision are in an incredibly strong position to continue growing their already substantial market share
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