Activision Blizzard (ATVI) reported financials for the second quarter that were upbeat relative to expectations, but the overall guidance here is not what I'd describe as exciting. Activision's revenue and earnings still declined in the quarter, and the company's forecasting for the rest of 2019 doesn't indicate much of a bull case for the stock.
Revenues declined by 14.9% year over year to $1.39 billion, while operating income shrunk to $336 million vs. $434 million the year prior. The 22.58% drop is not something to be ignored. Overall, a gain in net interest income boosted pretax income to $370 million. Higher tax expenses than last year resulted in net income of $328 million. That's an 18.4% decline.
On a diluted share basis, Activision reported earnings of $0.43 per share. That vastly outperformed their outlook of $0.21 per share, but came in well below 2018's $0.52 per share.
What's interesting is how much Activision has become primarily a subscription and licensing company, versus a seller of actual video game products. Chalk it up to the lack of new names or releases within their library, but Activision is very reliant on subscriptions/licensing which accounted for $1.04 billion of their total revenue for the quarter. For the first six months of the year, this segment of revenue accounted for $2.2 billion while product sales accounted for a little over $1 billion.
Moving forward, Activision's management put emphasis on investing in its key names. Such as games like Call of Duty, World or Warcraft, Overwatch, and Candy Crush. I wonder to a degree whether Activision can reinvigorate itself using the same playbook over and over again, or are things becoming stale? Sure, we're going to see a nice jolt when a new Call of Duty comes out, but does it justify the share pricing over the long term? The World of Warcraft investment lends itself to their current subscription growth, as it is mainly an online game setup, but my feelings are the same.
Looking into more traditional video game channels, the next big thing here is going to be the newest Call of Duty: Modern Warfare. Expected this fall, I'm sure the game will provide a boost to product sales. Will it be enough to make the stock run?
Looking ahead, Activision is forecasting full year 2019 GAAP earnings of $1.41 per share. That's well below 2018's full year earnings of $2.35 per diluted share. It also doesn't equate to the current stock pricing. Despite having lost a little less than half of its value over a one year period, ATVI shares are still expensive relative to guidance. At $49, ATVI is trading at 34.75x full year earnings expectations. In an industry that seems to be shifting in many directions, with new forms of gaming seemingly taking center stage, I wonder whether it's a wise stock to invest in. Titles like Fortnite seem to rule the day. Ten years ago, no one would have thought that anything could take the throne from COD, but here we are. That's the nature of this industry. Gamers are always looking for more immersive experiences. I don't even really play video games, but I know that.
I urge caution here. Yes, the release of the next Call of Duty, coupled with investment in names like Overwatch, World of Warcraft, and Candy Crush can most likely spur more engagement, but trends are constantly shifting within the gaming industry. I don't see the wisdom in paying such a high premium for this stock, as it is already priced very high, with new guidance that doesn't suggest any wonders. Bobby Kotic, CEO, expressed how "audiences will have a chance to see and experience the initial results" of efforts to invest in the company's essential franchises. I'm sure it will bring positive results, but it's difficult to gauge what this stock will do in relation to those results. ATVI ran so high, and we saw what happened when weakness was exposed. If like me, you like value, I think it wiser to wait and see on this one.