Activision Blizzard (ATVI) has been one of the hottest stocks on the market for the last few years, fueled by the growth of mobile games and innovations like esports. But in 2018, it's battling a new trend: the explosion of Epic Games' Fortnite.
Next week's second-quarter results will be the first true look at Activision Blizzard's results while competing with Fortnite, now fully scaled into a game with revenue that could impact Activision Blizzard's results. Here's what to watch for from the earnings report.
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The bar Activision Blizzard set for itself
The first thing investors should do is compare Activision Blizzard's results to the guidance given by management on May 3. Here are the details of that forecast.
| Metric |
Q2 2018 GAAP |
Q2 2018 Non-GAAP |
|---|---|---|
| Net revenue | $1.555 billion | $1.555 billion |
| Operating margin | $21% | 31% |
| EPS | $0.26 | $0.46 |
Data Source: Activision Blizzard Q1 2018 earnings release.
Revenue won't be particularly impressive, because most important game releases will be in the second half of the year. But if there's a revenue miss, it could be because another game has taken precedence for consumers.
The new video game opponent
What investors will really want to know is how Fortnite is impacting Activision Blizzard's engagement and financial results. The game recently passed $1 billion of cumulative revenue, according to SuperData, and is currently on pace for about $4 billion in annual revenue.
The engagement side is where I think we would see an impact first. In the first quarter of 2018, monthly active users (MAUs) were 51 million for Activision, 38 million for Blizzard, and 285 million for King. If any of the engagement figures fall by a significant amount (which I would consider 5% or more), it could be cause for alarm.
Esports is a success
We know that Overwatch League has been a hit with consumers, recently selling out the Barclays Center in Brooklyn for the Overwatch League final. What we don't know is what impact the league will have on Activision Blizzard's financial results.
With nearly all of the league's season now behind us, investors should be able to tell if esports will move the needle for Activision Blizzard long term or be a small part of the business. I think it has a chance to be a huge business for those willing to wait for the upside.
What's next?
There are areas management may touch on that could drive growth for years to come. Esports and plans for an expansion of Overwatch League, or the launch of new leagues would be a welcome discussion. Virtual reality has long been something that Activision Blizzard acknowledged but didn't put significant resources into. Will that change?
Finally, guidance for the third quarter and the rest of 2018 will be key, especially now that Fortnite is a sizable business that may be hurting the revenue of other video game companies. As of early May, Activision Blizzard's full-year guidance called for $7.355 billion in revenue and earnings per share of $2.46 on a non-GAAP basis. Any changes higher or lower could have a corresponding effect on Activision's stock price.
