Since the January spike, Activision Blizzard (NASDAQ:ATVI) has failed to fill every breakout pattern it had. Most recently, in early April, Activision stock looked like it could break out from the $49 per share to target $58 or even fill the massive gap from last earnings disaster. But that too failed.
So it’s not a surprise to see the stock lagging as it came into the earnings event — only up 6.4% compared with the S&P 500 up 16% for the same period. The lag is much worse today after the event tizzy.
Last night, ATVI reported earnings. Activision Blizzard stock staged a slight rally into the event, but then, the bears came out in force to sell the earnings headline. Wall Street hated what they saw and for good reasons.
Activision Stock Earnings
Activision Blizzard did beat on sales and earnings expectations. But they failed to impress investors with their forward guidance on both lines. They merely reaffirmed their forecast when the whispers were expecting more. As a result, Activision stock is down 4% this morning and retesting recent support.
Luckily, this is not likely to carry on for much longer. There is definite support below current levels. The zone around $44 per share has been pivotal for Activision stock for almost five years.
Usually pivot zones are strong support unless the company gives the bears a reason to open a new trap door. While the earnings report failed to impress, it didn’t open a new Pandora’s box to warrant trekking into new lows. Compare this to the November earnings when the stock fell off a 35% cliff.
In November, the news changed the game for investors so they sold it with conviction. As a result, ATVI stock didn’t bottom with the markets in December. Instead it set its lows this February.
I don’t believe the news management delivered last night is cause to make new lows. And therein lies information to trade.
Trading ATVI Stock
If I am already long Activision stock I have no reason to panic out of it here. This of course depends on time frame and risk appetite but fundamentally stocks need reasons to completely collapse beyond supports. None of that is obviously imminent here.
For those who want to try and catch the falling knife, this could be a good place to start longs. While I am not confident the bulls can breakout of the $50 zone, I am equally confident the floor will hold.
There is the risk that the whole market poses. Since the S&P 500 is within 2% of the all-time highs and with so many looming geopolitical headline risks, ATVI is vulnerable to a market wide correction. But that too is not my thesis at this time. I believe that the U.S. and China leaders will strike a deal and we go back to trading the P&L’s.
Activision Isn’t the Only Video Game Stock With a Problem
The price pattern in ATVI is not a stock specific problem. Many of its competitors are in the same boat. Take-Two Interactive (NASDAQ:TTWO) also has failed to breakout above its recent pivot of $100 per share.
The fundamental problem for these gaming companies is the shift into the free-to-play format. These stocks got marred by Fornite which is partly owned by Tencent Holdings Limited (OTCMKTS:TCEHY). The market wants free games and they have produced billions in sales. ATVI are reluctant to commit.
Management noted that they are pursuing new pro e-sports leagues like Overwatch. But the company is happy with its pipeline while analysts are weary of it. They do get a ton of attention from their King division. Players spend almost 40 minutes playing Candy Crush.
I bet they will need to evolve and embrace the free-play genre revolution before it’s too late. But they are taking their time to jump into the hottest thing since gaming started. This could be a strategic mistake, but it’s an ongoing process so I won’t call it doomsday for Activision stock yet.
The Bottom Line for Activision Stock
Fundamentally ATVI isn’t bloated with a 20x trailing P/E ratio, but it can definitely get cheaper. So there is no value against which to lean on this selloff. Bulls have to rely on the technicals for support.
Luckily, I believe in the price action above all — especially when there is no new reasons to sell. The drop here is on forecast disappointment not actual misses. For all we know, this could be management trying to under-promise so they can over-deliver.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.