The Ratings Game: Activision Blizzard stock is gaining, but analysts fret about a drawback in pandemic videogames boom


Activision Blizzard Inc.’s stock rose Wednesday after analysts applauded the videogame publisher’s strong earnings report but questioned whether the outlook was telegraphing a tough second half of the year compared with last year’s pandemic-fueled rush to gaming.

Late Tuesday, Activision Blizzard

said its “Call of Duty” gaming franchise drove a 72% year-over-year gain in quarterly revenue to $891 million in its Activision segment, for a 27% gain in revenue to $2.28 billion, topping Wall Street estimates. The company also hiked its outlook for the year.

Activision Blizzard expects revenue of $8.37 billion and bookings of $8.6 billion for the year. In response, analysts hiked their revenue estimates to $8.71 billion, from a previous $8.53 billion, and bookings estimates to $8.67 billion, from a previous $8.57 billion, for the year. The company also forecast full-year earnings of $3.42 a share, or $3.70 a share when accounting for deferred revenue. That prompted the Street to raise its consensus to $3.74 a share from a previous $3.67 a share.

Read: Gamers spent billions more on videogames during the pandemic, but what happens now?

That outlook, however, raised some speculation that the company is expecting some difficulty heading into the second half of the year, given the first quarter’s strong showing.

MKM Partners analyst Eric Handler, who has a buy rating and a $120 price target, said that while gamer engagement levels are still rising, year-ago comparisons are becoming more challenging.

“While the full year, 2021 EPS guidance moved higher to $3.70 from $3.60, this raised outlook only incorporates ~50% of the 1Q outperformance relative to the company’s expectations from the last earning’s call,” Handler said.

Stifel analyst Drew Crum, who has a buy rating and a $119 price target, noticed the same thing.

“A key takeaway from this update (in our opinion) was ’21 guidance was increased, although it does NOT embed the entire 1Q beat, but instead reflects some caution for the 2H,” Crum said. “Also encouraging was the company’s commentary around early 2Q trends which have been strong to date, notwithstanding tough comps.”

Wells Fargo analyst Brian Fitzgerald, who has an overweight rating and a $120 price target, said that while tough comparisons for the second half were unaddressed by the company, he said it “also sets up for classic Activision execution/delivery.”

Fitzgerald also turned his attention to the company’s Blizzard segment, which publishes the “World of Warcraft” franchise, along with the “Overwatch” and “Diablo” franchises. Blizzard-segment revenue only grew 7% to $438 million, but the company reiterated its plan to grow out its other franchises the way it has “Call of Duty.”

“The Diablo franchise appears on track with ‘Diablo Immortal’ launching later this year,” Fitzgerald said. “But Blizzard’s strategy to make ‘Overwatch 2’ into a $1B+ franchise is still unclear to us.”

Cowen analyst Doug Creutz, who has a market perform rating and a $100 price target, focused on “signs of real growth” at the company’s King segment, which it acquired five years ago and features “Candy Crush” as its lead game. King-segment revenue rose 22% to $609 million from a year ago.

“We estimate that King in-game spending in Q1:21 reached its highest level since Q1:15; additionally, advertising appears to be on pace for at least $300MM in revenue in 2021,” Creutz said.

“[Monthly active users] increased sequentially for the first time in a year,” Creutz noted. “King’s annual revenue had been stuck in the $1.9B-$2.1B range since the acquisition, but appears set to break out of that range decisively this year; management indicated that King revenue has continued pacing strongly thus far in Q2, as with CoD.”

Of the 34 analysts who cover Activision Blizzard, 29 have buy ratings on the stock, four have hold ratings, and one has a sell rating, according to FactSet. Of those, four hiked their price targets on the stock while one lowered theirs resulting in an average price target of $114.38, up from a previous $113.64, according to FactSet data.

At last check, Activision Blizzard shares were up 3% at $91.39. Over the past 12 months, shares have gained 33%, while the iShares Expanded Tech-Software Sector ETF

has gained 43%, the S&P 500 index

has grown 46%, and the tech-heavy Nasdaq Composite Index

has surged 55%.

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