Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
What do you call it when an analyst looks at a stock selling for $43 and change, and predicts it will gain 20% and hit $52 a share within a year?
If you're investment banker Stephens, you apparently call it a "downgrade" -- albeit only one to equal weight, and justified by a reduction in price target from $57. Still, this is a pretty weird downgrade we're looking at today, as negative sentiment from the analyst weighs on shares of Activision Blizzard (NASDAQ: ATVI), down more than 1% in afternoon trading.
Here's what you need to know.
A downgrade sourced from the gaming press
Up until today, Stephens was feeling pretty bullish about Activision Blizzard, rating the stock overweight and predicting it would rise as much as 30% on the strength of the company's robust pipeline. As indicated by the new price target, Stephens is actually still bullish -- but based on recent rumblings in the gamer industry press, the analyst now feels there's a bit "more risk to our 2020 upside case."
In that regard, it's worth pointing out that at a share price just 19 times trailing earnings, Activision is trading far below the 46-times-earnings multiple it's averaged over the last 10 years (according to data from S&P Global Market Intelligence). Despite this apparent imbalance, the likelihood of Activision stock returning to historical multiples looks like "less of a certainty," Stephens tells us in a note covered on TheFly.com today.
Why is that? The analyst cites a report that came out on gaming website Kotaku over the weekend, which refers to a "major upheaval" in the company's upcoming Call of Duty 2020 project, currently titled Black Ops 5.
As Kotaku explains, Activision puts out a new Call of Duty game every fall -- and has done so like clockwork every year for the past 15 years. In recent years, the company has cycled development of the franchise among three of its internal gaming studios, like so:
- In 2012, Treyarch produced Call of Duty: Black Ops II.
- In 2013, Infinity Ward produced Call of Duty: Ghosts.
- In 2014, Sledgehammer Games produced Call of Duty: Advanced Warfare.
- 2015: Treyarch -- Call of Duty: Black Ops III.
- 2016: Infinity Ward -- Call of Duty: Infinite Warfare.
- 2017: Sledgehammer -- Call of Duty: WWII.
- 2018: Treyarch -- Call of Duty: Black Ops IIII.
- 2019: Infinity Ward -- probably a new Modern Warfare game.
By this pattern then, Call of Duty 2020 should have gone to Sledgehammer. And indeed, Sledgehammer was scheduled to be developed in cooperation with another Activision-owned studio, Raven Software. But trouble was evident from the outset. For one thing, in this pairing, Raven would take the lead in developing the 2020 game, with Sledgehammer assuming a supporting role. Now, Kotaku reports that both Raven and Sledgehammer are being demoted into supporting roles, while Treyarch is taking over as the lead developer.
What it means for investors
Now, it's not known exactly why Activision has decided to shake up the production routine -- twice! -- for its uber-successful Call of Duty franchise. (The sudden departure of two of Sledgehammer's co-founders early last year, and subsequent hiring away of many of their staff to follow the leaders, may have had something to do with it. Infighting between the teams at Sledgehammer and Raven may also have contributed to the shake-up.)
What is known is that it ordinarily takes three years for Activision to get a new CoD game ready for release, and with Treyarch being subbed in at the last minute, it is being given one-third less time in which to get Call of Duty 2020 ready for prime time.
In Stephens' view, this time crunch raises the potential for Call of Duty 2020 turning into a rush job, which could hurt the quality of the game. Kotaku reports that Treyarch staff are bracing to endure "brutal overtime hours" to get the project completed on time.
Additional questions that investors must now ask themselves: Will "brutal hours" alone suffice to get this upcoming Call of Duty title published on time, or might Call of Duty 2020 get pushed into 2021? And further down the line, might there not be knock-on effects for Treyarch? After all, according to Activision's usual production schedule, Treyarch would also ordinarily be next up in the rotation to produce whichever Call of Duty game is scheduled to come out in 2021. Unless that changes, Treyarch studio may end up juggling two major CoD projects simultaneously, hurting the quality of both releases.
In Stephens' view, Activision may help to clarify all of this at its upcoming BlizzCon gaming convention -- but that doesn't roll around until November. That still leaves a whole lot of time for Activision Blizzard stock to continue a slide that's already subtracted 39% from its market cap over the past 52 weeks.
Even with Stephens insisting Activision shares are cheap, and could rise over the course of the next 52 weeks, investors should be cautious about reaching for this particular falling knife.
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