The Activision Blizzard Death Spiral Continues: Direct Indexing Use Case V

In an era of tight labor markets and ever more skilled employees, can companies afford to have culture and management issues?

Is it a distraction or a sign of decline and financial underperformance?

Big questions for a Holiday Monday!

For now, it is clear that Activision Blizzard ($ATVI) has problems.

The gaming company, creator of such mega franchises as World of Warcraft and Call of Duty, is currently struggling on two fronts:

  1. It is facing multiple regulatory probes into its workplace culture and various forms of employee harassment and discrimination.

  2. Related but distinct from the above, the software firm is facing employee walkouts and protests and externally it is facing a user boycott and online activism.

So, Activision really isn't doing very well.

The company's current situation, however, also leads to a serious question.

When do these problems spiral from impacting Activision's culture and reputation to impacting Activision the gaming company?

In other words, the main factor in Activision's success is building and selling quality video games.

What if that quality becomes inherently harder to achieve because of these internal scandals and external distractions?

At present, the stock market typically looks at these problems as they always have:

Sure, they are a negative for the brand and the management of the company but as long as they do not hurt the core business function investors sort of shrug and there is less of a market based feedback mechanism than we might expect or prefer.

In other words, investors look at these issue and say: big whoop. People are addicted to their games and none of these controversies, as repugnant as some of it may be, really changes that fact.

But, to paraphrase Peter McWillians, what if it does?

Better put: What if Activision's terrible culture and approach to management is actually a signal that it will no longer be able to compete in the ultra competitive market of high end addictive video games?

In other words, when does a terrible culture and scandal riddled management become a sell signal for a company's core competency?

The ultra competitive gaming market is no place for a deteriorating product that used to make over $8 billion in revenue but is now vulnerable not just to distraction but to being unable to deliver a new and better product.

There is, after all, a cycle with video games. As with music you can be top of the charts one minute and a forgotten one hit wonder the next.

So why would this be Activision Blizzard's fate?

Hear us out:

There are three big reasons for this shift:

1) We are in a famously TIGHT labor market, especially for anyone even remotely approaching a competent software engineer. Many of Activision's best and most valuable employees can get another job and without some subset of those employees it will be very hard to produce the games that Activision has sold so profitably and its customers know and love.

2) Furthermore, as the labor market bifurcates further - especially in technology - between AI assisted robots/programs and incredibly talented individuals then the ever fewer Activision employees will have more, not less bargaining power.

And we haven't even mentioned retail investors!

3) As the GameStop saga reveals, retail investors have real power. And as we have detailed before and here, retail flows are:

  1. present and accounted for

  2. very sizable and very steady

  3. not to be underestimated in determining short to medium term outcomes.

As a few "very sophisticated" hedge funds discovered this year, retail investors can stay irrational or angry or really any sort of emotion longer than short sellers can stay in business.

This can also be true for companies themselves. Right now the focus among retail investors has been for stocks or assets that are going UP, like Bitcoin or GameStop or Dogecoin or AMC.

But democratization of finance continues and tools and knowledge become ever more available then using a strategy or tool like Direct Indexing can lead to those same flows carefully avoiding a company like Activision.

You do not need to short the company. You simply need to decide not to own it to impact its stock.

As the personal finance and investing tools of the 1% start to become available to the 99% we will, as we already have with GameStop and other examples, find markets acting and reacting in new and unexpected ways.

Think of it this way: if you worked at Activision, would you tell your friends to go buy the equity? What if you could tell them to avoid it and give them a tool to do so.....?

How low can it go?


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