Activision Blizzard (NASDAQ:ATVI) is one of the best-performing stocks on the market heading into its second-quarter earnings report on Aug. 2. That rally reflects optimism about the video-game developer's improving operating trends even as it faces challenges from chief rival, Electronic Arts (NASDAQ:EA). It also means the company has a lot to prove when it posts its results this week.

Let's look at the big trends investors will be looking for from Activision this week.

Friends with controllers in hand cheer as they sit side by side playing a console game.

Image source: Getty Images.

Reach and engagement

To churn out profits, Activision's operating model requires a large and growing base of users who are deeply engaged in their games. Its audience was an impressive 431 million players last quarter thanks to a record performance on the Blizzard side of the business. That division was lifted by the hit Overwatch, which quickly shot up to over $1 billion in annual sales to become the developer's eighth billion-dollar franchise.

Players engaged in an esports tournament.

Image source: Getty Images.

The Activision segment lost gamers, though, slipping to 48 million from 50 million in the prior quarter. Executives believe upcoming major releases, including a zombie chapter in the Call of Duty: Black Ops 3 franchise in May and then Destiny 2 in early September and Call of Duty: WWII two months later, will reverse that trend for the full year .

The King Digital segment shed gamers last quarter, too. Yet management isn't worried about that dip, given that the remaining users became more highly engaged. Its most active players, for example, spent 35 minutes a day, on average, playing games.

Activision Blizzard is hoping to return to rising overall engagement levels following a dip to 40 billion hours of gameplay across its portfolio last quarter from 43 billion during the holiday-season quarter.

Digital selling

Digital sales, which are both more profitable and less seasonal than traditional retailing sales, are up to 77% of Activision's business over the past 12 months. A large subscriber base for the World of Warcraft franchise, meanwhile, kept that figure well above Electronic Arts' 61%. 

ATVI Operating Margin (TTM) Chart

ATVI Operating Margin (TTM) data by YCharts

Activision's best hope for improving on that result is in keeping a steady flow of popular content releases coming from both the Activision and Blizzard publishing arms. The bigger wild card right now is just how much of a contribution King Digital will make to the company's profit potential. There are good reasons to be optimistic, given that its 35% operating margin last quarter was already close to the company's average. That number should rise, too, once Activision executives roll out the advertising platform they see as a major untapped opportunity to help monetize King Digital's base of over 300 million players.

Looking ahead

CEO Bobby Kotick and his executive team raised their sales and profit outlook in May and are currently targeting 2017 sales of $6.1 billion as non-GAAP earnings come in at $1.80 per share. If the developer raises that forecast again this week, it will probably be due to a mix of improving audience figures and rising player spending. A downgrade is less likely, in my view, but could be driven by surprisingly weak pre-orders for the Call of Duty: WWII game.

In either case, Activision will keep its focus on churning out engaging gaming content heading into the peak holiday-shopping season as it works to build up complementary revenue streams including advertising across esports streams, licensing properties for movies and TV, and marketing consumer products based on its most popular franchises.

Demitrios Kalogeropoulos owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.