Activision Blizzard (ATVI 0.17%) announced strong operating results in its latest earnings report. Sales beat management's forecast again as gamers continued to engage -- and spend cash -- in hit franchises like Call of Duty, World of Warcraft, and Candy Crush.
Yet the stock dropped immediately following the report after the developer delayed a few of its most anticipated new content launches. Is this a classic case of an overreaction by investors focused on the short term?
Let's take a closer look.
Good growth in Q3
Audience size and engagement metrics were solid in the third quarter, even as growth slowed compared to booming gains during the earlier phases of the pandemic in 2020.
The Activision segment's user base rose to 119 million gamers compared to 111 million a year ago. The Call of Duty franchise is still benefiting from the addition of free-to-play offerings on consoles, PCs, and mobile devices.
The Blizzard division also boosted engagement and revenue thanks to the successful launch of Diablo 2: Resurrected. That title helped keep Blizzard's active user base nearly steady at 26 million compared to 30 million a year ago.
Overall, the company edged past management's forecast on both sales and profits through late September. "I'm pleased to report strong third quarter results ahead of our prior outlook," CEO Bobby Kotick said in a press release .
A weaker pipeline
Wall Street was more interested in the challenges at Blizzard that are impacting the developer's ability to crank out quality content at its usual industry-leading pace. The management shakeup in that segment has revealed weak spots in a few creative projects, Activision said. As a result, the company is making the rare move of delaying several of its biggest game launches, set for 2022.
The move will allow the Overwatch 2 and Diablo IV titles to have their best shots at successful releases, followed by a long period of steady content refreshes. However, it also means Activision will have a weaker 2022 than most investors had forecast.
"These decisions will push out the financial uplift that we had expected to see next year," management warned in an investor presentation, "but we are confident that this is the right action for our people, our players, and the long-term success of our franchises."
An overreaction by Wall Street?
It shouldn't make any difference to investors if Activision Blizzard books its financial boost from these titles a bit later, so the stock's slump this week might seem like an overreaction. Yet the scheduling move does add risk to the earnings outlook because shareholders can't be certain when the games will be fully ready, or if there are wider development problems that might impair their value even after they launch.
Combined with the management changes at Blizzard recently, the pipeline update implies that the developer isn't operating at its full potential today. There's no way to know how long it will take before Activision can fix that shortcoming.
The wider business isn't in danger of losing its leadership role in the industry, and Activision's stock might look more attractive after falling in response to the Q3 earnings update. But investors should brace for some volatile results and an unusually weak growth year ahead, as the Blizzard side of the business works to recover its momentum.