The bright side is that it probably can't get much worse from here.
On Monday, Stock Advisor recommendation Activision
More specifically, the company's $0.23 in third-quarter earnings per share was well short of the $0.36 per-share analyst estimate. The company's fourth-quarter expectation for a net loss of $0.07 to $0.09 per share is also shy of the estimate, which calls for earnings of $0.02 per share. For the full year, the company now expects to earn only $0.09 to $0.11 per share on $1.41 to $1.42 billion in revenues. Revenues are expected to drop to "slightly" more than $1 billion in fiscal 2007, with a "modest increase" in earnings per share as the company launches a more "focused slate" (fewer titles) than in fiscal 2006. By comparison, the current analyst estimate calls for fiscal 2007 earnings of $0.47 per share on $1.48 billion in revenues.
Even after that, the Tuesday drop in stock price was only 5.6%, down to $13.56.
I think the bottom is approaching, even if it is further off than previously expected. While third-quarter sales actually grew 20% to $816.2 million, what hurt here is that costs skyrocketed -- marketing expense was up 48% and product development costs more than doubled over last year's third quarter -- but that's to be expected as the big names jockey for next-generation market position. And while new titles such as True Crime: New York City (current-generation consoles only) and the western shooter Gun disappointed this past quarter, the jaw-dropping Call of Duty 2 for the Xbox 360 -- the platform's best-selling game since its launch -- hints that Activision will be a heavyweight.
So yes, the near-term outlook that Activision has presented is bleak. However, that has already been priced into what is already an arguably cheap stock, and so the downside appears limited. Moreover, Activision is well-positioned to be a major player on the next-generation consoles -- the last two of which are almost certain to arrive later this year -- and I think that advertising revenue will ultimately provide an added punch to the bottom line. Given that, I think investors have been presented with a favorable scenario for a buy.
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