Why Did Activision Blizzard Stock Fall Around 35% Since June 2018?

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Activision Blizzard’s (NASDAQ:ATVI) stock has fallen around 35% since the end of Q2 2018. This can be attributed to expected lower revenues, margins, and price to earnings multiple, along with a growth in shares outstanding for the full year 2019. The company announced it won’t launch the next game in World of Warcraft franchise in 2019. The game had bolstered Blizzard segment’s 2018 revenues, and hence the revenues are expected to see a decline. You can look at our interactive dashboard analysis ~ What Factors Led To Around A 35% Decline In Activision Blizzard’s Stock Price Since H1 2018? ~ for more details.  In addition, you can see more of our Information Technology data here.

Activision Blizzard’s Stock Has Fallen Over 35% Since Mid Last Year, Due To A Decline In Revenues, Adjusted Net Income Margin, And The Earnings Multiple, Along With A Modest Growth In Shares Outstanding

#1. Revenues Are Expected To Decline By 17% In 2019, Primarily Led By the Blizzard Segment

  • Total revenues could decline from $7.5 billion in 2018 to $6.2 billion in 2019, in line with the company’s guidance.
  • Activision revenues will likely decline 7%, led by declines in both monthly active users (MAUs), and average revenue per user (ARPU).
  • Blizzard segment will likely see a sharp decline of as much as 50% in sales. The company will not see any 2019 release in the World of Warcraft franchise, which aided 2018 revenues.
  • King revenues will likely remain flat, as the segment is expected to benefit from expansion of its Candy Crush franchise.

#2. Net Income Margin Could Decline By 6% In 2019, As The Company Sees Higher Marketing Costs For Its New Games, Along With Higher Taxes As Compared To 2018

  • Activision Blizzard’s adjusted net income could decline from $2.1 billion in 2018 to $1.6 billion in 2019.
  • This can be attributed to lower revenues and contraction in adjusted net income margin.
  • Adjusted net income margin will likely decline from 28% in 2018 to around 26% in 2019.

#2.1 Operating Costs Could Decline From $5.5 Billion In 2018 To $4.5 Billion In 2019

  • COGS as % of revenue could decline from 33.6% in 2018 to 32.0% in 2019.
  • R&D as % of revenue grew could see modest decline from 14.7% in 2018 to 14.5% in 2019.
  • S&M as % of revenue could increase from 14.2% in 2018 to 15.0% in 2019, led by launch of new games.
  • G&A as % of revenue could see modest growth from 11.1% in 2018 to 11.4% in 2019.

#2.2 Taxes Will Likely Be Higher In 2019 And Weigh On The Overall Adjusted Net Income Margin

  • Effective tax rate in 2018 was very low for Activision Blizzard, due to the one time tax benefit recorded during the year.
  • Tax rate will likely increase sharply in 2019.
  • Note that the taxes along with other certain items, are later adjusted in Non-GAAP adjustments.

#2.3 Adjusted EPS Could Decline 22% Led By Lower Revenues And Margins, And A Modest Growth In Share Count

  • Adjusted EPS could decline from $2.72 in 2018 to $2.11 in 2019.
  • This can be attributed to lower adjusted net income, and a modest growth in no. of shares.
  • Shares outstanding could grow from 771 million to 772 million in 2019, in line with the company’s guidance.

#3. Price To Earnings Multiple For Activision Blizzard Saw A Contraction of 20% Since End of Q2 2018

  • P/E Multiple for Activision Blizzard declined from 28x in 2018 to 22x in 2019, based on the stock prices as of June 30.
  • Lower revenue and earnings guidance for 2019, as well as slowing demand for the company’s Call of Duty franchise, likely contributed to this decline in multiple.

 

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