Activision’s Blizzard and Take-Two take a hit

Activision and Take Two posted results on Monday, with the former beating on earnings and revenue, but the latter missing sales expectations. Activision’s shares gained after hours, following record quarterly net bookings, while Take Two’s reduced guidance saw its share price fall.

• Activision and Take-Two share prices decline in after-hours trading.
• UK regulator poised to release provisional findings on Microsoft’s acquisition of Activision.
• Global X Video Games and Esports ETF offers exposure to Take-Two and Activision.

Activision’s Blizzard [ATVI] and Take-Two’s [TTWO] share prices slipped in after-hours trading on Monday. This followed an earnings and revenue beat for Activision, with net bookings at a record high.

However, Take-Two’s earnings report was less positive, as the company slipped 26.6% in its EPS and lowered its fiscal year (FY) 2023 net bookings guidance. Take Two’s share price slipped 4.2% in after-hours trading.

Take-Two’s share price has fallen 39.7% in the past 12 months, as a result of an environment that chairman and CEO Strauss Zelnick called “in many ways more challenging” than the company had expected. The stock is up 1.4% year-to-date, having fallen 8% in the two sessions prior to the earnings release.

Activision’s stock fell 9.4% over the preceding 12 months, with a decline of 6.5% year-to-date. Like Take-Two, Activision’s share price nosedived in the two sessions prior to the earnings release, losing 7.2%. In this case, however, it may be due to a $35m settlement that the US Securities and Exchange Commission has ruled the company must pay over workplace complaints.

Activision’s EPS of $1.87 for the fourth quarter of 2022 beat Refinitiv analysts’ expectations of $1.51 by 23.8%, and marked a 49.6% year-over-year increase. Similarly, revenue of $3.6bn came in 13% above analysts’ expectations of $3.2bn, and rose 43.4% year-over-year.

For the full year of 2022, Activision posted earnings of $3.41 per share, beating analyst expectations of $3.05, but representing an 8.3% year-over-year decline. Full-year revenue of $8.5bn beat analyst expectations of $8.11bn, and represented a 1.9% year-over-year increase.

Take-Two appears to have almost met analyst expectations of non-GAAP EPS of $0.87, coming in at $0.86, despite a GAAP loss per share of $0.91. Revenue, however, came in at $1.4bn, 2.8% short of the $1.5bn that Refinitiv analysts had forecast, although the figure represented an impressive year-over-year increase of 56%.

Take-Two’s revenue guidance for FY 2023 was also lowered to between $5.20bn and $5.25bn. The company is embarking on a cost-cutting regime, with layoffs forming part of the company’s attempts to save $50m beginning in the current quarter. Activision did not provide detailed guidance due to its planned merger with Microsoft [MSFT].

However, the report did say the company expects “at least high-teens year-over-year growth for GAAP revenue, and at least high-single-digit year-over-year growth in net bookings and total segment operating income for 2023”.

Tighter regulation spells trouble

As the companies’ earnings reports were released, Activision was preparing for the British regulator’s provisional findings on the Microsoft merger. Coming ahead of the decision of counterparts in the US and EU, the Competition and Markets Authority’s decision would be unlikely to be repealed by UK courts, and could scupper the proposed $69bn deal.

Bloomberg Intelligence analyst Jennifer Rie asserted that “an unconditional clearance is unlikely”, and if the regulator does decide to permit the deal, it will include provisions “beyond just licenses for Call of Duty”.

Increased regulation is a potential headache for developers across the video game industry, with the US Federal Trade Commission proposing a ban on non-compete clauses in December.

Such clauses have been used by video game studios to limit their top employees from moving freely to competitors; their removal would intensify competition for talent within the industry and could drive up wages, even as the likes of Take-Two look to reduce their employee costs.

Funds in focus: Global X Video Games and Esports ETF

Investors seeking exposure to both Activision and Take-Two, as well as the online gaming market more broadly, can select the Global X Video Games and Esports ETF [HERO]. As of 3 February, Take-Two is the top holding in HERO with a 5.99% weighting. Activision is its fourth-largest with a 5.78% weighting.

Over the last 12 months, the fund fell 26.9%. As with Activision and Take Two, it has seen moderate gains of 5.4% in 2023 to date, but dropped dramatically over the two sessions prior to 6 February, falling 5.8%.

Refinitiv analysts yield a consensus 12-month price target of $95.00 for Activision, implying 37.2% upside from the 6 February close over the next year. The equivalent figure for Take Two – $130.50 – implies gains of 23.6%.