Activision Blizzard (ATVI) reported 3Q18 revenues matching estimates with EPS ahead of expectations. However, implied 4Q18 guidance was weaker than expected, sending the shares sharply lower. While the guidance was likely conservative given the highly competitive holiday season this year, 3Q18 results were not good enough to support the stock in a punishing environment for growth stocks.

ATVI called out a negative impact from the under-performance of the recently launched expansion for Destiny 2. This is a concern, however, Call of Duty: Black Ops 4 should sell well enough to help overcome that weakness. King Digital also released a new title in the popular Candy Crush series that is expected to do well.

ATVI has accomplished a lot in 2018 with blockbuster game launches and major expansions along with the successful growth of the Overwatch League. The company has been firing on all cylinders for the past several years, owns a strong library of old and new franchises, and has exciting opportunities to grow via e-sports and mobile advertising.

While the stock might be taking a breather, the long-term prospects of ATVI appear strong. For now, Northlake is focused on 4Q results and upcoming FY19 guidance. If the recent game launches deliver as expected, the stock could see a quick rebound. Even assuming lower multiples across the video game industry and other growth sectors, Northlake continues to see upside of $64 to $80 reflecting 20x to 25x 2019 EPS of $3.20. At the current depressed price-to-earnings multiple of 14.5x, Northlake believes the market is now underestimating a compelling growth story.

ATVI is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.