Activision Earnings Preview: Should Investors Expect A Beat And Raise?

Activision Blizzard ATVI will report its first quarter 2014 results after market close on Tuesday. The popular video-game developer and publisher is expected to earn $0.10 per share on revenue of $688.23 million, based on the consensus estimates.

The last time Activision reported earnings was on February 6, when the company earned $0.79 per share, above the consensus estimate of $0.73. Revenue of $2.27 billion came in $50 million higher than analysts expected.

Activision hinted during its fourth quarter conference call that Destiny could join Call of Duty and Skylanders as a billion-dollar franchise.

Activision issued guidance and expects to earn $0.09 per share in the first quarter on revenue of $675 million. For the full year fiscal 2014, the company expects to earn $1.26 per share on $4.6 billion of revenue.

With a 2014 pipeline that includes updates to World of Warcraft and Diablo III, as well as a September release date for Destiny, investors will be paying close attention to the company's first quarter results to gauge how the company is performing in a highly competitive and tight space.

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Wedbush: Expecting Beat And Guidance Hike

Michael Pachter of Wedbush is expecting Activision to at the very least match his bullish expectations given the company's busy quarter.

Pachter explains that during the quarter Blizzard released Hearthstone: Heroes of Warcraft and the first Diablo III expansion, Reaper of Souls (which sold over 2.7 million units in the first week). Call of Duty: Ghosts is “likely among the most popular titles” among gamers while Skylanders will be an important contributor to the company's results.

With such a busy first quarter, Pachter is expecting management to raise its full year 2014 guidance.

“Management typically provides conservative guidance, with much uncertainty about the rate of current gen declines,” Pachter explains. “We think that top-line guidance is too low given incremental releases this year.”

Another reason why Pachter believes management's guidance is conservative is the fact that the company has a 28 percent lower share count, but the company is guiding for an earnings per share growth of “only” 34 percent.

Pachter is expecting Activision to earn $0.11 per share on $709 million of revenue.

Shares are Outperform rated with a $22 price target.

Brean: Are Investors Ignoring A Growing Market?

Todd Mitchell of Brean Capital explores the market size of the free-to-play digital card game market, of which Activision has a presence with its Hearthstone free-to-play digital card game.

According to Mitchell, the digital card game market has grown to nearly $1 billion a month, with digital card games alone generating over $1 billion per year. Naturally, as the market grows, gamers need to develop a standout title with strong marketing to back it up.

“Hearthstone, a slickly produced title based on the Worlds of Warcraft lore supported by Activision's impressive marketing team, checks all of these boxes. With Hearthstone's success, we expect Activision to continue to go after this growing market segment with other free-to-play titles,” Mitchell wrote.

Investors are well aware of potential growth stories such as a potential partnership with Tencent Holdings to bring Call of Duty to China, but it's possible that some investors don't recognize growth stories within the digital card space.

Mitchell notes that Hearthstone could generate over $100 million in 2014 as it continues to capitalize on industry trends with its “polished gameplay.”

Activision could scale Hearthstone to greater levels when it launches on Android, following successful launches on PC/Mac in March and an iPad version in April. Moreover, Activision already has a single-player expansion update in its pipeline, which can bolster engagement with a weekly release format.

Mitchell is expecting Activision to earn $0.10 in the quarter.

Shares are Buy rated with a $23 price target.