Can Activision Blizzard (ATVI) Continue Its Earnings Streak?

Activision Blizzard Inc. ATVI is set to report second-quarter 2015 results on Aug 4. Last quarter, the company delivered a positive earnings surprise of 333.33%. The company has delivered positive earnings surprises in the last four quarters, with an average beat of 246.53%. Let’s see how things are shaping up for this announcement.

Factors to Consider

Activision reported strong results in the last quarter, with both top and bottom lines surpassing their respective Zacks Consensus Estimate.

Activision’s new game releases including the likes of King’s Quest: A Knight to Remember, Skylanders SuperChargers Dark Edition and Whispers of Oblivion have the potential to be among the largest and most profitable in their respective spheres, in our view, and this should be reflected in the to-be-reported quarter results.

Furthermore, the company is set to launch a number of other games in the near term.

We believe that Activision’s superior product portfolio offers it a competitive advantage over the likes of Electronic Arts EA, Take-Two Interactive Software Inc. TTWO and Glu Mobile, Inc. However, management’s cautious approach is commendable due to volatility associated with the console transition cycle.

However, Activision’s limited presence in the mobile gaming segment, higher adoption of free-to-play games and significant competition are headwinds in the near term. Also, the fact that the company depends on a handful of mega franchises (Call of Duty, World of Warcraft and Skylanders) for the lion’s share of its revenues makes it highly susceptible to the success of these games. Also, free-to-play game such as Heroes of the Storm could have a detrimental effect on other game releases.

For the second quarter, Activision expects non-GAAP revenues of $600 million. Earnings are expected to be 1 cent a share. Operating margin for the second quarter is projected to be 10.0%.

Earnings Whispers

Our proven model does not conclusively show that Activision is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 5 cents. Hence, the difference is 0.00%.

Zacks Rank: Activision’s Zacks Rank #3 (Hold) when combined with a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stock to Consider

Here’s a stock that you may want to consider as our model shows that it has the right combination of elements to post an earnings beat this quarter

Ducommun Inc. DCO, with Earnings ESP of + 69.23% and a Zacks Rank #1 (Strong Buy).

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