What happened

Shares of Activision Blizzard (ATVI) lost 10.8% in value last month, according to data provided by S&P Global Market Intelligence.

Video-game stocks can't seem to do anything right these days. It certainly didn't help Activision Blizzard's cause last month when the company issued a disappointing fourth-quarter earnings report.

A young man playing a video game on a PC with a large audience in the background


So what

While the company delivered record revenue and earnings for the full year, fourth-quarter revenue was below management's expectations. CEO Bobby Kotick said, "We didn't execute as well as we hoped to in 2018, and our current outlook for 2019 falls below what is possible in an industry filled with growth opportunities." 

On the surface, the fourth-quarter results looked solid, with revenue up 16.5% year over year to $2.381 billion, and earnings per share up 84% year over year to $0.90. Also, monthly active users increased by 11 million in the quarter to 356 million, breaking a multiquarter slide in this important measure of audience reach and engagement. 

Regardless, management wasn't pleased with in-game spending, which was particularly weak in Destiny, Overwatch, and Hearthstone. Weak in-game spending is why non-GAAP revenue of $2.835 billion in the fourth quarter came in below management's guidance for $3.048 billion. Digital revenue made from in-game purchases is Activision Blizzard's largest revenue stream, comprising about 57% of total revenue in 2017. 

Check out the latest earnings call transcript for Activision Blizzard.

Now what

In response to the abrupt slowdown in player investment, management is calling 2019 a transitional year. Several changes were announced, including discontinuing its investment in the Destiny franchise -- which was developed in partnership with a third-party studio -- as well as beefing up its game development staff by 20%. 

While management expects these moves to enhance growth over the long term, the company will take a hit this year on the top and bottom lines. For 2019, management is calling for revenue to decline by 20% to $6.025 billion. That is expected to translate to a decrease in earnings per share of 32% to $1.85. 

This is a classic situation of enduring short-term pain for long-term gain. On the bright side, the video-game industry is continuing to grow about 11% per year, and Activision Blizzard still has one of the largest gaming communities in the world across all of its games. Plus, the company continues to see progress in growing its esports business and is starting to target the fast-growing mobile game market with a few of its best-selling franchises, including Call of Duty and Diablo