Activision Blizzard Inc. (ATVI) is snowing in shareholders on Friday.
Shares of the Santa Monica, California-based video game maker were down after hours Thursday and were sustaining the slide before Friday's open after announcing it is cutting the cord with development partner Bungie, offering its popular Destiny franchise as a parting gift to the former partner on Thursday evening.
Thank you Guardians. It's been an honor and a privilege to help bring the world of Destiny to life for you. pic.twitter.com/EB1y19OTD8
— Activision (@Activision) January 10, 2019
Activision Blizzard shares will have fallen more than 40% from their six-month high if the pre-market decline of around 8.5% holds, with a spate of bad news tempering the stock's post-Christmas correction to the upside.
The split-off of the Destiny franchise is pivotal as Destiny at the time of its release was the best-selling video game of all time, charting $325 million in sales in just the first five days. The total sales of the franchise mark one of the company's highest-grossing franchises in history, joining household names such as Call of Duty, World of Warcraft and Guitar Hero in the pantheon of playables grossing more than $1 billion in its lifetime.
Analysts are not as high on Activision Blizzard as they had been, at least in the near term.
"In our view, video game companies' multiples are driven by execution consistency and pipeline. These are both more uncertain at ATVI now tactically," Morgan Stanley analyst Brian Nowak commented on Friday. "While ATVI has a strong history of creating hit IP, this decision puts an even higher importance on ATVI delivering blockbuster hits and new multi-year franchises going forward, which is increasingly difficult in this evolving digital gaming world where gamers are playing existing leading franchises for longer."
Nowak said many analyst models will need to be shifted as continued revenue from Destiny 2 and the expectation of Destiny 3 was already factored into his own forecasts.
Seven analysts cut their price targets for the company amid the uncertainty, according to FactSet.
Most cited the expectation of a "noisy" quarter to be reported and a lower guidance when the company reports in February as the Destiny spin-off only adds to the concern around executive departures and the dearth of blockbuster releases in the remaining pipeline.
"The short-term narrative will question the health of existing franchises, execution, leadership changes, and implications for the pipeline, which we believe are valid concerns," Keybanc analyst Evan Wingren wrote in a research note. "We expect earnings to be flat to modestly down year over year, driven by lower Blizzard revenue and the removal of Destiny."
Still, some were not surprised by the move away from the Destiny franchise.
Stifel analyst Drew Crum said secular shifts driving the industry outweigh the loss of a franchise that was already waning.
In maintaining his "Buy" rating on the stock, Crum said the relationship with Destiny developer Bungie was ill-fated in the end.
"The separation makes sense, in our view, as the relationship between Activision Publishing and Bungie had reportedly been challenged for several years," Crum said. "[The relationship] seemingly deteriorated following what ATVI management described as a disappointing performance for Destiny 2."
The disappointment of Destiny 2 was noted by Activision Blizzard executives during an earlier earnings conference call for the company's inability to meet targets for return on investment, suggesting that the capital allocated to the game could indeed be better spent elsewhere.
Many analysts highlighted the remaining opportunity for long-term investors eyeing the secular shift to video games, which is now an industry that nearly triples the revenue of the film industry.
"We continue to have conviction in our long-term thesis. we expect the shift to digital; expansion of gaming as a medium; and ancillary opportunities within eSports, mobile, and streaming to lead to significant terminal value creation, all of which we believe are unchanged by recent announcements," Keybanc's Wingren wrote, defending his maintenance of a "Buy" rating on the stock.
For the time being, the noisy quarter is expected to obscure that long-term view as many analysts look for more concrete comments on which to create models in the company's Feb. 12 earnings call.
