Maybe for those living in the tropics, or even more temperate climates, the winter season barely interrupts the flow of daily life. Commutes get tough. The days grow short. Plenty of hard working folks don't see the sun between Sunday evening and Saturday morning, unless through a window. Morale sags. Activision Blizzard (ATVI) is headquartered in Santa Monica, California. Temperatures there, even on the coldest days, generally stay above 50 degrees Fahrenheit. This year though, Activision Blizzard knows winter. Why is that? Oh, the reasons are several.
In sports, when a backup quarterback leads a team to a Super Bowl championship they say he was lucky. When it starts to look like it could happen two years in a row, some folks might call it destiny. When it comes to games, I would not know Parcheesi from Destiny, but one thing is painfully obvious this morning. That game franchise was certainly financially significant in terms of impact upon ATVI's potential success. When the firm tells you that they do "not expect to recognize material revenue, operating income or operating loss from the Destiny franchise in 2019", and the stock immediately drives off of a cliff, you know that negative response in terms of guidance is on the way. How did ATVI lose this key franchise?
The Destiny games are a product of video game developer Bungie. Bungie actually used to be part of Microsoft (MSFT) before they went off on their own. In 2010, the firm hooked up with Activision in order to get their products published. Bungie, in their statement, announced that they had received a cash investment from abroad in the past year, and that they were now ready to publish their own works.
Perhaps the disconnect between Activision Blizzard and Bungie was simply destiny itself after there had to be some concern after not just one, but two high level executives left the firm last week. On Wednesday, January 2nd, Netflix (NFLX) confirmed that that firm had hired Activision Blizzard's CFO to take that same position at NFLX. The very next day, Square (SQ) named Amrita Ahuja as that firms CFO. Ahuja had been serving as CFO of the Blizzard Entertainment division of Activision Blizzard. Six days after that, the firm tapped a number of leaders for C-level roles within the firm.
Buy Activision Blizzard on This Dip?
Obviously buying any name on the initial day of a significant drop in price rarely works for investors. May work for a day trader. Then again it may not. Let's go to the chart.
ATVI has gone through a very rough three months (who hasn't?). The stock had broken out of a downward sloping Pitchfork with the new year. Unfortunately, today's selloff is the second gap lower over the time frame covered. Can the stock recover? There's a lot of wood to chop. Sure the firm already has enough top gaming franchises in house, like Call of Duty, but that's already accounted for in revenue projections. This is a need to replace loss. I don't see a catalyst that gets me involved in the name other than the discounted share price.
Risk Averse Gamer Trade
ATVI goes to the tape with quarterly results on February 12th. I think it likely that the firm will try to put a positive light on not just the loss of the Destiny franchise, but prospects for the firm's in-house products, as well as executive level stability. I know that some of you can't help yourself, and will enter. Here's one way that a retail investor could go about this in a risk averse way.
-Purchase one ATVI February 15th $47.50 call (last: $2.15)
-Sell one ATVI February 15th $50 call (last: $1.25)
The long call buys the right to own the shares at $47.50 upon expiration. The short call sells the right to someone else at $50.00. The sale partially subsidizes the purchase. Net debit: $0.90. In other words, the investor is risking $90, hoping for a return of $250, or a net profit of $160, best case. That's a profit of 177%.