What To Expect From Activision Blizzard’s Q4?

Activision Blizzard (NASDAQ: ATVI) is scheduled to report its fiscal Q4 results on Thursday, Feb 2. We expect ATVI stock to trade lower, with its revenue and earnings likely falling below the street estimates. Activision has seen a decline in average monthly users over the recent quarters. It will be interesting to see if this trend reversed in Q4 with the launch of the next Call of Duty game, which topped the 2022 charts in sales. ^[1] Although we don’t expect any earnings surprise from Activision Blizzard, our forecast indicates that ATVI stock is undervalued, partly due to concerns over the pending acquisition by Microsoft, as discussed below. Our interactive dashboard analysis on Activision Blizzard Earnings Preview has additional details.

(1) Revenues expected to be below the consensus estimates

• Trefis estimates Activision Blizzard’s Q4 revenues to be around $2.9 billion, vs. the $3.2 billion consensus estimate. This compares with the $2.5 billion in sales the company reported in the prior-year quarter.
• The company should benefit from its latest Call of Duty game released in Q4. Some other games, including Diablo Immortal and Candy Crush games, have been doing well in the recent past, a trend expected to continue.
• Looking back at Q3, the company reported revenue of $1.8 billion, reflecting a 13.9% y-o-y decline, as a 10% growth in Blizzard and a 6% rise in King segment sales were more than offset by a 25% fall in Activision segment revenues.
• Our dashboard on Activision Blizzard Revenues offers more details on the company’s segments.

(2) EPS likely to be slightly below the consensus estimates

• Activision Blizzard’s Q4 adjusted earnings per share (EPS) is expected to be $1.49 per Trefis analysis, compared to the $1.51 consensus estimate and $1.25 the company reported in the prior-year quarter.
• The company’s adjusted net income of $539 million in Q3 reflected a 23% fall from its $699 million figure seen in the prior year quarter.
• Activision Blizzard saw about a 500 bps decline in operating margin (for its three segments) in Q3, while it was down over 1000 bps for the nine months ending Sep 2022.
• Looking forward, we expect the adjusted EPS to be higher at $3.73 in 2023, compared to an estimated $3.02 in 2022.

(3) ATVI stock is undervalued

• We estimate Activision Blizzard’s Valuation to be $94 per share, which is 23% above its current market price of $77.
• ATVI stock has seen a 3% fall in the last twelve months and remains well below the $95 price offered by Microsoft.
• At its current levels, ATVI stock is trading at 21x its 2023 earnings estimate of $3.73, compared to the last three-year average of over 24x, implying that it has more room for growth.
• Now, if the company reports upbeat results, with sales growth and 2023 guidance better than the street estimates, it is likely that the P/E multiple will be revised upward, resulting in even higher levels for ATVI stock.
• Note that Microsoft’s proposed acquisition of Activision Blizzard has faced regulatory hurdles in the U.S., Europe, and the U.K. The U.S. FTC has sued Microsoft to block the proposed acquisition stating that it will hurt competition in the gaming industry.

While ATVI stock looks undervalued, it is helpful to see how Activision Blizzard’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Take-Two Interactive vs. Fair Issac.

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[1] Month-to-date and year-to-date as of 1/30/2023
[2] Cumulative total returns since the end of 2016

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1. NPD has revealed the best-selling games of 2022 in the United States, VGC, Jan 16, 2023 [↩]