Rebound In Activision Blizzard Shares Unlikely As Game Delays Dent Price

Activision Blizzard (NASDAQ:ATVI) reported Q3 earnings on Nov. 2 and beat expectations. The California-based electronic gaming and multimedia company also announced that the releases of the newest iterations of two of its most popular games, Overwatch 2 and Diablo IV, will be consensus rating is a buy and the consensus 12-month price target is 41.65% above ATVI’s current share price. Of the 32 analysts, 26 are bullish and 6 are neutral.

Source: Investing.com

The Wall Street consensus outlooks calculated by E-Trade and Investing.com, are both bullish and have 12-month price targets that are about 40% above the current share price. The very high expected price appreciation is largely attributable to the substantial decline in the share price in recent months.

The consensus 12-month price target has fallen, but the share price has gone down even more. The analysts are generally sticking to their positive outlooks, even as the market has sold off.

Market-Implied Outlook for ATVI/h2

In March, I calculated the market-implied outlook to Jan. 21, 2022 (using options that expired on this date). For this article, I have calculated the market-implied outlook for ATVI to Jan. 21, 2022, as well as to June 17, 2022, using the prices of options that expire on each of these dates.

The standard presentation of the market-implied outlook is in the form of a probability distribution of price return, with probability on the vertical axis and return on the horizontal.

Source: Author’s calculations using options quotes from E-Trade

The market-implied outlook to Jan. 21, 2022 is generally symmetric, although the peak probabilities are tilted towards negative returns. The maximum probability corresponds to a price return of -4% over the next 2.25 months. The annualized volatility derived from this distribution is 34.8%.

To make it easier to compare the relative probabilities of positive and negative returns, I rotate the negative return side of the distribution about the vertical axis (see chart below).

Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.

Viewed with this representation, it is clear that the probabilities of negative returns are consistently higher than for positive returns of the same magnitude for a wide range of the most-probable outcomes (the red dashed line is above the solid blue line for almost every return in the left ⅔ of the chart). This is a moderately bearish outlook, consistent with peak probability at a negative price return.

The market-implied outlook for the 7-month period from now until June 17, 2022 is consistent with the shorter-term outlook. The probabilities of negative returns are consistently higher than for positive returns of the same magnitude. There are two small peaks in probability, one corresponding to a price return of +1.5% and one corresponding to a price return of -10.5%. This is a moderately bearish market-implied outlook for the next 7 months. The annualized volatility calculated from this distribution is 37.2%.

Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.

Summary/h2

ATVI is 33% below the 12-month high and the shares look cheap on the basis of estimated forward earnings. The Wall Street consensus price target has declined in recent months, but the share price has fallen more. The result is that the current 12-month price target implies a higher expected return than back in March (40% today vs. 24% in March).

The Wall Street consensus rating continues to be bullish. Back in March, the market-implied outlook to January 2022 was bearish and continues to be bearish. The market-implied outlook to June 2022 is also bearish. In considering the recent management commentary on release delays, the bullish Wall Street consensus outlook, and the bearish market-implied outlook, I am maintaining my neutral rating for ATVI.