Wall Street analysts cut their price targets on shares of Activision Blizzard (ATVI) on Wednesday after the video game publisher delivered a sobering fourth-quarter report. But Activision stock surged as the company pledged to cut underperforming games and reinvest in its key franchises.
Activision stock jumped 7% to 44.57 on the stock market today.
Late Tuesday, the Santa Monica, Calif.-based company said it earned an adjusted $1.29 a share on net bookings of $2.84 billion in the December quarter. It matched analyst estimates for earnings, but missed Wall Street’s sales target for sales of $3.04 billion. On a year-over-year basis, earnings per share jumped 37% while sales climbed 8%.
Activision’s guidance was weak for the current quarter and full year.
Activision Earnings Guidance Misses Views
For the first quarter, Activision expects to earn an adjusted 20 cents a share on net bookings of $1.18 billion. Wall Street had forecast Activision earnings of 48 cents on sales of $1.49 billion.
For the full year, Activision guided to adjusted earnings of $2.10 a share on net bookings of $6.3 billion. Analysts were looking for Activision earnings of $2.58 a share on sales of $7.3 billion.
Activision announced plans to increase investment this year in its top franchises: “Call of Duty,” “Candy Crush,” “Overwatch,” “World of Warcraft,” “Hearthstone” and “Diablo.” At the same time, it will cut initiatives that aren’t meeting expectations.
Activision plans to cut about 8% of its workforce as part of a restructuring effort. Based on a reported staff of 9,600, about 770 Activision employees could be out of a job in the coming months.
More than a dozen Wall Street analysts cut their price targets on Activision stock after the company’s earnings report.
Free-To-Play Games Present Growing Threat
Baird analyst Colin Sebastian reiterated his outperform rating on Activision stock, but cut his price target to 58 from 69.
Activision faces a competitive threat from free-to-play online games, such as “Fortnite” from Epic Games and “Apex Legends” from Electronic Arts (EA), he said. Publishers make money on free-to-play games by selling digital extras, such as character costumes and weapons.
Jefferies analyst Timothy O’Shea said the top worry investors have about Activision stock is the impact of free-to-play games.
“It becomes increasingly difficult to convince gamers to pay $60 when high-quality competitive offerings are free,” he said in a report to clients. “We believe it is inevitable more free games will arrive, and our No. 1 prediction for 2019 is that Activision will announce a free-to-play game.”
Activision’s “Overwatch” and “Call of Duty: Blackout” are the most likely candidates to go the free-to-play route, he said. O’Shea rates Activision stock as buy with a price target of 60.
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