Activision Blizzard (ATVI) Q1 Earnings: What's in the Cards?

Activision Blizzard Inc. ATVI is set to report first-quarter 2016 results on May 5. Last quarter, the company delivered a negative earnings surprise of 2.41%. The company has delivered positive earnings surprises in the last four quarters, with an average beat of 122.35%. Let’s see how things are shaping up for this announcement.

Factors to Consider

Increasing digital revenues and continued strength of the Call of Duty title should cushion earnings in the first quarter. More importantly, it remains to be seen how the acquisition of King Digital pans out, which was formally completed in February this year. This will be the first quarter that will include revenues from King Digital. The buyout is a ploy to enter the lucrative mobile games market where so far Activision has had a limited presence. Moreover, it adds a sizeable female user base to its hardcore male dominated gamer base. King Digital’s iconic games Candy Crush and Candy Crush Soda saga are enormously popular among women.

Activision has been benefiting from its deep focus on broadening its franchise portfolio, innovation and initiatives to expand to new geographies. Activision’s offerings like StarCraft, World of Warcraft, Heroes of the Storm and Call of Duty have been widely popular and should continue to contribute to bottom-line growth.

Also, analysts observe that the company has been trying to improve its engagement levels by adopting a year-round model instead of a launch based model in which earnings and profits are derived only in a week. This should help to drive long term performance.

Of late, Activision has been making giant strides in its attempts to become a broad based media company. Apart from launching a movie studio, the company is also strengthening its presence in the lucrative e-sports market. As a part of the strategy, it acquired Major Gaming League for $46 million to boost its newly established e-sports division.

Nevertheless, higher adoption of free-to-play games and significant competition from the likes of Electronic Arts EA, Take Two Interactive TTWO and Glu Mobile, remain the near-term headwinds. Also, an uncertain macro-economic outlook is adding to its woes as video games form a part of discretionary spending. Also, the company’s dependence on a handful of mega franchises (Call of Duty, World of Warcraft) for the lion’s share of its revenues makes it highly susceptible to the success of these games.

For first quarter 2016, Activision expects non-GAAP net revenue of $800 million. 

Earnings Whispers

Our proven model does not conclusively show that Activision is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP:  Activision’s Earnings ESP is 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate stand at 10 cents

Zacks Rank: Activision’s Zacks Rank #3 (Hold) increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stock to Consider

Here’s a stock that you may want to consider as our model shows that it has the right combination of elements to post an earnings beat this quarter

Fitbit Inc. FIT has an Earnings ESP of +175.00% and a Zacks Rank #2 (Buy).

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