THE RATINGS GAME

© Bloomberg News/Landov Analysts surveyed by FactSet had estimated adjusted earnings of a 26 cents share on bookings of $1.19 billion.

As Activision Blizzard Inc. faces a backlash from the gaming community for siding with China over the Hong Kong protests, one analyst is concerned that the internal backlash within Blizzard may be more harmful for the company as a clash of corporate cultures comes to a head.

Activision Blizzard (ATVI) shares closed up 0.5% to $53.69 on Thursday, but are down 3.2% for the week. In comparison, the S&P 500 index (SPX) is down 0.5% and the tech-heavy Nasdaq Composite Index (COMP) is down 0.4% for the week. Over the past 12 months, however, Activision Blizzard shares have dropped 27%, compared with a 5.5% gain by the S&P 500 and a 7.1% gain for the Nasdaq.

Earlier in the week, Activision Blizzard suspended professional videogame player Blitzchung for a year after supporting Hong Kong protesters during a post-game interview. The controversy has blown up on Reddit and other online sites as loyal Blizzard gamers voice their dismay for the suspension, alleging the company is selling out to preserve Chinese sales.

Activision Blizzard derives 5.2% of its total revenue from mainland China, nearly double from a year ago, according to estimates from FactSet. The company reported annual revenue of $7.26 billion in 2018. Blizzard, known best for its “World of Warcraft” games, merged with Activision back in 2008 and in 2015 the company was added to the S&P 500 index (SPX)

Also, China’s Tencent Holdings Ltd. (HK:700)(TCEHY) acquired a 5% stake in Activision Blizzard back in 2016. Most recently, Activision Blizzard released its “Call of Duty: Mobile” game to more than 100 million downloads, and the company is still awaiting government approval to have the game released in China, the largest market for mobile games.

Cowen analyst Doug Creutz, who has a market perform rating on the stock and a $48 price target, said in a recent note that Activision Blizzard did not have “any good choices here, in terms of finding a solution that would protect their business interests.”

Creutz estimates China accounts for more like 10% of company revenue, and is most concerned that investors are counting on Blizzard to turn around the company’s fortunes and that Activision management just alienated that part of the business.

Most worrisome to Creutz was that “plaques devoted to two of Blizzard’s eight core values — ‘Think Globally’ and ‘Every Voice Matters’ — were covered up in front of Blizzard’s headquarters, possibly by current employees.”

Not everyone at Blizzard agrees with what happened. Both the "Think Globally" and "Every Voice Matters" values have been covered up by incensed employees this morning. pic.twitter.com/I7nAYUes6Q — Kevin Hovdestad (@lackofrealism) October 8, 2019

“In the wake of the departure of long-time CEO Mike Morhaime and the first-ever major restructuring the company has had to go through, there have been reports about concerns within Blizzard about the growing direct influence of Activision corporate in decision-making,” Creutz said.

Morhaime’s advisory role at Blizzard ended in April, after announcing he was stepping down as president and CEO a year ago.

“We suspect that the decision to punish Blitzchung, which almost certainly had input from senior Activision management, was met with dismay by a meaningful portion of Blizzard’s staff,” Creutz said. “Investors are counting on a turnaround at Blizzard to reinvigorate growth, but if the internal culture is in turmoil, there is a lot of risk to that thesis.”

Timing for the controversy could not have been worse as the company is holding its annual Blizzcon event on Nov. 1.

“After last year’s disappointing event, Blizzard has a lot of pressure to deliver a very positive experience this year,” Creutz noted. “The possibility (likelihood) of protestors disrupting events has to be of concern to the company. A heavy-handed approach to dealing with that eventuality could cause further damage to the brand.”

Of the 34 analysts who cover Activision Blizzard, 26 have overweight or buy ratings, seven have hold ratings, and one has an underweight rating, and an average price target of $57.24, according to FactSet.