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Activision Blizzard, Inc. (ATVI): Pause This Game for a While, You Might Be Better off Exiting It

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Activision Blizzard, Inc. (Well, it was quite inevitable and I had seen in coming three months ago. Investors had rejoiced after Activision Blizzard, Inc. (NASDAQ:ATVI) released its fourth-quarter results in January, but I was more or less sure that they were celebrating too early. The Street hadn’t paid enough attention to Activision Blizzard, Inc. (NASDAQ:ATVI)’s weak outlook then, and nor did any one heed management’s calls that 2013 was going to be a difficult year.

But, all of that changed this time when the video game publisher said that it expects to face tough times in the second half of the year, especially the holiday season. Thus, despite reporting estimate topping numbers for the first quarter and bumping up its guidance for the full year, Activision Blizzard, Inc. (NASDAQ:ATVI) shares crashed close to 6% –  weird ways of the Street I should say!

With the stark realities of the transition in the video game industry and stiff competition finally coming to light, will it be a good idea to book profits and hit the eject button now? The stock has gained close to 40% so far this year, something which I’d expected, but I think it’s time to go from thumbs up to thumbs down on Activision Blizzard, Inc. (NASDAQ:ATVI). Start counting the reasons.

WoW is no more wow!

World of Warcraft, one of Activision’s most famous games and an important source of revenue, has been bleeding subscribers. The game witnessed an exodus of 1.3 million subscribers in the previous quarter, a steep decline of 14%. The eight-year-old franchise has been kept alive through expansion packs, but the maturity of the game and the stiff competition it faces from free-to-play games could further eat into its subscriber base.

Activision Blizzard, Inc. (NASDAQ:ATVI) CEO Robert Kotick accepts this fact as he stated that the game could well see more declines going forward. However, the company will be trying its best to arrest the decline through investments to develop more content and push out updates more frequently in order to keep subscribers engaged. However, the changing winds in the gaming industry and the greater charm of free-to-play games certainly cannot be ignored and I doubt for how long Activision would be able to ward off their invasion.

As Forbes contributor Erik Kain pointed out, major game developers are moving to the free-to-play model as the players won’t have to shell out a monthly subscription, but they would instead make in-app purchases if they need. Also, the presence of viable substitutes for WoW would make it difficult for Activision Blizzard, Inc. (NASDAQ:ATVI) to keep this game’s stickiness intact.

Thus, with one of its most important revenue generators under pressure, you won’t be wrong if you think of pulling out your money from Activision Blizzard shares.

It’s gonna be really, really tough!

If the previous years were comparatively easy for Activision as far as competition was concerned, this one’s going to be equally difficult. With the number of titles in the fray in the second half of the year, Activision Blizzard looks on course to lose at least some share of its market.

As Fool analyst Demitrios Kalogeropoulos pointed out, one of the most potent threats would come from the stable of The Walt Disney Company (NYSE:DIS), which is slated to release Infinity in August and it would go head-to-head with Activision’s Skylanders, the publisher’s leading title in North America and Europe. Infinity is surely turning some heads, and the buzz is that The Walt Disney Company (NYSE:DIS)’s wide array of characters would certainly be a huge selling point. Moreover, Disney’s marketing force is more than capable of creating a dent in Activision’s Skylanders sales.

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