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Activision Blizzard: Can a New Era Be Conjured for ATVI Stock?

Dana Blankenhorn

The last year has felt like the end of an era for Activision Blizzard (NASDAQ:ATVI) stock. Activision Blizzard Chief Technology Officer and co-Founder Frank Pearce recently exited. A onetime top game, “StarCraft,” seems to be ending. Revenues for the second quarter were down 17%, and earnings dropped by nearly one-quarter compared with a year ago.

Activision Blizzard: Can a New Era Be Conjured for ATVI Stock?

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But CEO Bobby Kotick, who has run the company since he was in his 20s (he’s now 57), still made with the happy talk. The results “exceeded our prior outlook for both revenue and earnings per share,” he insisted during the release of second-quarter earnings. He claimed that investment in key franchises will start paying off soon.

Investors are not buying it. The stock opened Aug. 12 around $48, down from $49.15 before the earnings report. The stock traded as high as $83 before last year’s tech wreck. That ground has not been made up.

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The Bigger Problem for ATVI Stock

Activision Blizzard is known for games like “Overwatch,” “Call of Duty” and “Candy Crush.” These are sold at retail stores and played on PCs, tablets or consoles, sometimes with an online connection.

But the gaming world is moving off clients and toward the cloud.  The Cloud Czars — Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) are the most frequently mentioned — are about to take over.

Kotick isn’t worried. He insists the new platforms are “a great opportunity,”  because his company holds the content they need to succeed. ATVI has about 345 million active users each month, 78% of them playing “Candy Crush.” The company spent $5.9 billion on the game’s maker, King, in 2016.

Gaming is a field that must constantly reinvent itself. Activision Blizzard’s latest reinvention is focusing itself on eSports, in which people watch other users play video games for money. Its entry is The Overwatch League, which treats the phenomenon like football, with teams controlled by “owners” in various cities. Its big idea for 2020 is to create a second league for its “Call of Duty” franchise.

The Fortnite Problem

However, one great gaming idea can throw everyone’s plans in the dumper.

“Fortnite” is that great idea. The online game from privately held Epic Games of North Carolina, in which Tencent Holdings (OTCMKTS:TCEHY) has a 48% stake, now has 125 million players. Epic CEO Tim Sweeney is estimated to be worth $7.16 billion.

Instead of running professional “Fortnite” as a league, Sweeney runs it as a tournament. A 16-year old, Kyle Giersdorf, who goes by the online name “Bugha,” won $3 million in the most recent tournament.

As the money has poured in, however, the stakes have risen. One week after his victory, Giersdorf was “swatted.” Hackers sent armed police to his house on a false alarm. Fortunately, one of the police who responded was a neighbor who defused the situation. But a 2017 swatting over “Call of Duty” led to a gamer being killed by police and the swatter going to prison.

The Bottom Line for Activision Blizzard Stock

“Fortnite” and swatting illustrate two important points.

First, people take gaming seriously, and the physical risks of gaming, like swatting, could discourage people from playing. Giersdorf’s parents may be having second thoughts about their son’s windfall right now.

Second, great games can come from anywhere. It’s not just that new gaming companies may have better ideas. It’s that new gaming platforms are appearing constantly, thus the whole gaming paradigm is subject to change without notice.

The success of Activision Blizzard was based on the idea that they’d figured all this out and that their games could bring reliable, growing profits just like any other software package. The company’s market cap of just under $38 billion, however, now seems scant protection against the Cloud Czars. The success of “Fortnite” shows a buy-out may not be coming.

This is not a game I care to play. Know it well before you do.

Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT.

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