While the last five years have been very rewarding for Activision Blizzard (NASDAQ: ATVI) shareholders, the video game publisher's stock has recently taken a sharp turn into bearish territory. Negative fan response to the company's most recently unveiled game prompted some investors to take a more cautious outlook on the business, and increased concern that the publisher is out of touch with its audience was followed by uninspiring third-quarter earnings. That unfavorable string of news sent the stock tumbling, and shares are now down roughly 20% on the year and more than 40% from the lifetime high that they reached early in October.

I started buying Activision Blizzard stock in 2014, and while key risk factors facing the business are getting some extra spotlight and shouldn't be ignored, it's a stock that I'm still very confident in over the long term. 

Activision Blizzard characters.

Image source: Activision Blizzard. 

Putting Activision Blizzard's slide in context

Given that Activision Blizzard stock has swung from the lifetime high it reached at the beginning of October to its lowest price since May 2017, it's clear that recent developments are worrying investors.

ATVI Chart

ATVI data by YCharts

Some of these concerns are more valid than others, and I think that the recent sell-offs are an overreaction when viewed through the lens of the business's long-term outlook. The unfavorable reception for Diablo Immortal, for example, is something that investors shouldn't focus too much on. While hardcore franchise fans seemed to almost unanimously reject the company's recently announced mobile take on the long-running, PC-focused Diablo franchise, the move to bring more big franchises to phones and tablets makes a lot of sense and will probably wind up paying off.

Some of the engagement trends evidenced in Activision Blizzard's third-quarter report are of greater concern. Results for the September quarter arrived with declining sales, profits, and monthly active users (MAUs) -- as well as fourth-quarter bookings guidance that fell short of expectations.

The company's MAU base for the quarter dropped to 345 million, down from 384 million in the prior-year period. Much of the user-base decline came from the mobile-focused King segment, which actually managed to increase MAUs for its biggest game, Candy Crush Saga. The overall user base decline for the King segment appears to have been mostly down to nonpaying users leaving other King games -- not an ideal movement, but also not a shocking trend in the casual-focused mobile space and not greatly concerning in light of increased engagement for Candy Crush Saga.

There's also an issue with some softness in the franchise slate of the Activision and Blizzard wings of the company. Blizzard's MAUs dropped from 42 million in the third quarter of 2017 to 37 million in this year's period as franchises like Overwatch and Hearthstone saw player declines and a new update for the developer's aging World of Warcraft online role-playing game wasn't enough to lift overall MAUs across Blizzard games. Activision's Destiny franchise also isn't living up to expectations. 

Performance for key franchises should be monitored closely, but Activision Blizzard's long-term opportunities in an industry that still has huge room for growth shouldn't be underestimated. Players spent an average of 52 minutes per day with the company's titles last quarter, a new record and up from an average of 50 minutes per day in the prior-year period, and the long-term trend is that video games will account for a greater share of people's overall entertainment time. 

Activision Blizzard's growth story is just getting started

Some of Activision Blizzard's core franchises will continue to lose steam, but that's the nature of video game product life cycles. The good news is that, with the transition away from being dependent on one-time game unit sales to a model that's more focused on the sale of in-game items, these properties have longer life cycles than ever before and should stabilize at some point. That means that the company should be able to see profitable performance from legacy titles and build on that with the addition of new properties -- just as it has before, but with a stronger foundation. Declining engagement and sales for big franchises is something investors should keep an eye on, but they also shouldn't lose sight of how impressive the longevity for these franchises has become thanks to the games-as-a-service model. 

Interactive entertainment is still relatively young as a medium when compared to movies, television shows, or music, and it's difficult to imagine scenarios in which video games become less popular and account for a smaller share of the overall entertainment industry. A potential growth driver like esports is even younger. Hundreds of millions of people around the globe already tune in to watch competitive gaming content, and Activision Blizzard's strong collection of video game properties position it to be one of the big winners if esports continues to grow at a rapid clip.

In addition to owning some of the best franchises in gaming, Activision Blizzard also has some of the most talented and consistent development teams in the industry. These qualities have the company poised to benefit from many of the gaming industry's most promising growth vectors. If esports keeps gaining ground or technology platforms like augmented reality and virtual reality take off, Activision Blizzard's treasure chest of properties and development expertise have it lined up to be a major beneficiary. An expanding global audience for gaming content should also work in its favor.

Activision Blizzard's audience spans roughly 200 countries, and while most of its sales currently come from the American and European markets, there's big growth potential outside of those geographic segments. The company's decision to devote more resources to expanding its big franchises onto mobile has been criticized by hardcore fans, and Activision Blizzard will need to deliver high-quality content that satisfies those fans if it wants them to stick around, but the move should significantly expand its audience and translate to sales and earnings momentum. 

A next-gen entertainment company

Activision Blizzard has been pursuing the goal of building a Walt Disney-like media empire around its video game offerings that will extend to film, television, and consumer products. With a long-term goal like that, some bumps in the road are to be expected. Some titles might fall short of expectations. A push to bridge a popular franchise to the big screen might stumble. Esports might take a bit longer to solidify as a dependable sales pillar than some shareholders would like. That said, the company has a strong foundation for its multimedia push, and I think its chances of achieving its goal are underappreciated. At the very least, its odds of success are not substantially diminished from where they were at the start of this year.

With the stock market in a potentially volatile state, Activision Blizzard stock could continue to see some negative pressure. However, I recently added to my position and think the business's outlook remains very promising and that investors with a long-term approach will see strong performance from the company over the next decade.