Activision Blizzard's (NASDAQ:ATVI) stock has taken a beating since the release of its much-hyped video game, Destiny. The title was positioned as the beginning of the company's next major franchise, but early sales and player feedback were not strong enough to sustain the record-high valuation Activision enjoyed prior to release. Making matters worse, the company's Blizzard wing recently announced that it had canceled a project that had been in development for seven years. These disappointments have contributed to a roughly 21% decline in the company's share price from September highs.
Have recent events revealed fundamental weaknesses in an over-hyped company? Or is Activision Blizzard's stock a buy after suffering a substantial dip? Let's take a look.
Putting things in context
Prior to the release of Destiny, Activision CEO Bobby Kotick promised that the game would go on to become the most successful new property in gaming history. The fact that the title achieved this feat, selling more than 5 million copies in its first five days on the market, may make the steep decline in the company's valuation somewhat confusing, but given the expectations surrounding the release and the cyclical nature of the industry, the drop is understandable.
Activision's consistent ability to introduce new properties to replace those in decline has been one of the company's defining strengths, and any sign that the company may not be able to keep its streak going is cause for concern. Call of Duty and World of Warcraft, two of Activision's most important series, are still doing big numbers, but both series are currently in a state of commercial decline. Last year's Call of Duty was the series' weakest performer in several years, and preorder tracking suggests that this year's sequel will do even worse. Meanwhile, Warcraft's subscriber base has declined to roughly 7 million, down from peak levels of approximately 12 million subscribers.
What Destiny and the cancellation of Titan say about Activision
There's no denying that the launch of Destiny was an important test for Activision Blizzard, and that the results have, thus far, come up below expectations. The game may receive updates that will help to sustain and grow its player base, but the prospects for paid expansions and sequels now appear dimmer than they did pre-launch. This new uncertainty is made even more troubling by the cancellation of Blizzard's Titan. It's worrying enough that the project spent seven years in development, only to be scrapped, but it now looks like Activison Blizzard's hold on the online gaming market could be slipping. With subscription-based models, used in games like World of Warcraft, appearing increasingly unsustainable, Destiny and Titan were key projects for testing and establishing new revenue structures. The Destiny series may still go on to accomplish many of the company's goals, but the cancellation of Titan casts doubt on whether or not Blizzard can deliver another hit MMO within the next five years.
Are Activision Blizzard and other gaming companies in trouble?
Activision Blizzard isn't the only gaming company to see downward pressure on its stock since September. In fact, Electronic Arts, Take Two Interactive, and Ubisoft have all seen notable dips in pricing over the stretch.
After last year's record-breaking revenue and the successful introduction of new consoles from Sony and Microsoft, the outlook for this year's performance has dipped due to a weaker than expected software slate. Destiny falling short of the bar established by pre-release hype is a factor here, as are big delays from other publishers and a shortage of games that take full advantage of the new-generation hardware.
Reasons for optimism
In May 2012, Activision released Diablo 3 to strong critical reviews and vocally dissatisfied consumers. While the title initially appeared like it would disappoint and be unable to sustain a healthy player base, Blizzard's post-launch handling steered the game to ongoing success, and it now stands as one of the company's stronger performers.
It's not unreasonable to think that similarly efficient management of Destiny could improve the outlook of the franchise. It's also possible that Blizzard has been working on another MMO project in addition to the canceled Titan. If the developer has something big to show at its early November Blizzcon conference, Activision stock could see a signficant rebound. Blizzard has also been making progress with the free-to-play model. Its game Hearthstone has accumulated roughly 20 million players, and the upcoming Heroes of the Storm has the potential to build a large audience which could drive digital revenue through microtransactions.
The most recent declines in Activision Blizzard's share price represent the biggest drop the stock has seen since the 2008 financial crisis. Destiny's performance relative to expectations and the cancellation of Blizzard's Titan have raised important questions about whether the company has lost its knack for franchise management, but the increased skepticism may also provide an attractive entry point. Given the secretive nature of game development, there's a significant amount of guess work as to what the future holds for the company. As such, whether or not the stock is an advisable buy depends on if you think the company's recent stumbles will continue, or if Activision Blizzard is capable of righting the ship.
Keith Noonan owns shares of Activision Blizzard and Take-Two Interactive. The Motley Fool recommends Activision Blizzard and Take-Two Interactive. The Motley Fool owns shares of Activision Blizzard and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.