The Hidden Truth Behind Activision Blizzard’s Outlook

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The joy of Activision Blizzard (NASDAQ: ATVI) investors when they see a massive spike in the share price can be compared to parents’ happiness when their baby takes his first steps, since both of them are rare events. Despite delivering terrific results in the past one year, the stock had barely budged. But all that changed this time.

Activision posted yet another solid quarter and its shares took off towards the galaxy, rising as much as 11% after results. More surprisingly, Activision shares have gained around 26% in the past three months, something which I had expected but wasn’t entirely sure if such a thing can happen.

Also, investors celebrated the company’s terrific fourth-quarter with all pomp, ignoring a shallow outlook for the current quarter and the entire year. Its revenue and earnings expectation of $4.175 billion and $0.80 per share for the full year are quite behind consensus estimates of $4.56 billion and $0.97, apart from being behind the company’s own fiscal 2012 performance.

Ignorance is not always bliss

Since Activision is known for lowballing guidance, investors didn’t pay much attention to it. But were they right in doing so this time? They expect the stock to start running now, but it might fall right down like that baby who just took his first steps. Management seems concerned about how Activision might perform this year due to certain challenges, which indicates that the company might not be guiding low intentionally for the current year. Or will it turn out to be a faux pas? Let’s check.

After a strong 2012, Activision calls 2013 as a year of transition. The present generation of gaming consoles, the Microsoft (NASDAQ: MSFT) Xbox 360 and Sony’s (NYSE: SNE) PlayStation 3 in particular, are almost eight years old now. Activision is skeptical about how the next console transition might affect its performance.

Microsoft is expected to put the next iteration of its hugely popular game console on sale later this year in November, after Sony fires its own salvo in October. The Xbox 360 had taken the world by storm when it released years back, and it won’t be surprising if the next version is sold out once again like its predecessor on launch. Similarly, Sony has also found considerable success with the PS3 but might take the PS4 to another level by focusing on home entertainment in a big way, so as to give consumers an added incentive.

Thus, with the next generation of the console wars almost upon us, consumers might put off spending on game titles for the current consoles. This would probably hurt Activision this year, since the launch dates would probably be set for late 2013. However, given the fact that Activision boasts of having the number one console title and has games with loyal following, it should bounce back next year.

The mobile threat

The transition in console generations seems like one of the reasons why Activision has guided lower for the year, and as I said, it should be back to speed after the next console generation takes over. However, CEO Robert Kotick has identified some more threats to its business, labeling them as “unproven business models.

Declining sales of PCs and rising sales of tablets and smartphones might have something to do with this threat. Sales of gaming hardware have been on the decline in the past few years as mobile devices have taken center stage. Although they aren’t still at the level of an Xbox or a PC, they do provide a good and varied gaming experience without being too heavy on the pocket. In addition, the advent of novel gaming consoles such as Ouya, which is a video game console running Android and allows gamers to become developers as well, marks the changing dynamics in the video gaming industry.  

Mobile devices are expected to hurt consoles and PCs, and the signs are evident. Nintendo, which launched the Wii U in November last year, cut its sales outlook for the year by 17%. The Wii U didn’t sell as well as expected in the holiday quarter and this is certainly bad news for the gaming hardware industry. A new device not being able to match its predecessor in terms of sales doesn’t make for a good reading for both hardware makers and traditional game publishers such as Activision.

The bottom line

Shrinking sales of gaming hardware devices and PCs haven’t affected Activision Blizzard much so far, but the company can’t remain immune forever. Thus, 2013 is crucial for Activision as the trends in the video game industry will unravel later in the year after Sony and Microsoft launch their next-gen consoles.

The company has time and resources on its side to enhance its existing portfolio of mobile games as a hedge against fluctuations in the traditional gaming industry. It launched five mobile games last year, and continues to invest in the platform. Hopefully, Activision would be able to turn this mobile threat into an opportunity in the future and become a leading player in the multi-billion dollar mobile gaming. But the transition won’t be without pain and investors should keep this in mind.

TechJunk13 has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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