As of the time of this writing, Activision Blizzard (ATVI) is down 12% on the news that developer Bungie is splitting up with Activision Blizzard and taking the rights to the game Destiny with them. While it is a little arguable how much of a blockbuster franchise that Destiny is, Bungie is a well-thought of developer and losing that relationship now (especially after a string of bad news for the company) certainly doesn’t look good and leaves Activision Blizzard with one less tentpole franchise to rely on.

It has been a rough 3-4 months for the market in general, but especially for Activision Blizzard. They’ve lost not just one, but two CFO’s. Their latest earnings report showed some troubling trends with their engagement numbers. The normally universally beloved and unassailable Blizzard encountered some pretty strong negative reaction to the announcement of Diablo: Immortal. Blizzard has also seem some talent leaving along with some formerly popular games nearing the end of their life. At the same time, there’s been precious little good news to offset all of the bad.

Until recently, Activision Blizzard had been a great performer for the Freedom Portfolio. The key words being, “until recently”. Check out the chart above. Activision was crushing it until the last few months where they’ve pretty much given all of those gains over the market back.

Things definitely aren’t looking good for the company right now. The acquisition of King Digital still seems like a giant question mark considering the high cost paid and the declining engagement rates for that segment. King still hasn’t shown that it is capable of creating any hits outside of its blockbuster Candy Crush franchise. Call of Duty appears to have taken a hit due to the unexpected popularity of Fortnite. Destiny is now gone. Even the incredibly consistent Blizzard is starting to see some cracks forming for their franchises in terms of World of Warcraft numbers continuing to drop and lackluster response to the new Diablo game. There isn’t even any new IP on the horizon to point to as a potential catalyst for future growth.

Let’s take a look at the P.A.U.L. score as it stands now:

P.A.U.L. Score

Protected: 2

Not too long ago, I probably would’ve rated this as at least a 3, as it seemed like Blizzard had a strong portfolio of intellectual property that really did a good job of keeping people playing its games. It’s still amazing to me that World of Warcraft is going as strong as it is 14+ years after being released.

However, I think we’re starting to see how weak the pull of certain gaming franchises can be and how many options gamers have. One small misstep can drive fans away and there are plenty of other options for people to play. When a hot new game like Fortnite comes out, there’s actually very little to stop people from playing Call of Duty or Overwatch. This is becoming a big problem that Activision Blizzard needs to find a way to address.

Alternatives: 4

One of the biggest reasons I liked Activision Blizzard is because I saw a lot of potential directions that they could go with their intellectual property. They seemed to be one of the leaders in popularizing (and monetizing) eSports with things like their Overwatch League. They also seemed willing to make a strong effort at breaking the curse of video game movies and I had high hopes for the Warcraft movie. That ultimately didn’t turn out well, although the movie did do surprisingly well in China which prevented it from being a complete bomb. They also seemed to be one of the few publishers who have a strong enough selection of games to be able to offer a game subscription service like Xbox Game Pass or EA All Access.

The jury is still out on all of the above. I still think eSports has huge potential and some day somebody will crack the nut of how to make a good video game movie. Remember that for years comic book movies had limited success and now they are the biggest blockbusters every year. I think franchises like Starcraft and Diablo and Overwatch have that same type of potential.

Understanding: 4

All-in-all, Activision Blizzard is a pretty easy company to understand. They’re in the business of making games that people want to play, and making sure people buy those games. The industry is shifting a bit, though. More people are buying digital copies of games and skipping the middle-men of Gamestop and other retailers. More importance is being placed on things like downloadable content (DLC) and in-game/in-app purchases as a way to monetize games even after they’ve been bought. The King segment even flips the script somewhat in that many of their games are given away for free in the hopes that players will make in-app purchases down the line. Publishers are also starting to see some push back from gamers (and lawmakers) about these shifts towards in-game and in-app purchases. The business is fairly understandable now, but it might not remain that way for long.

Long Runway: 3

When I bought Activision Blizzard, this might’ve been a 4, but now I feel like it has to be lower. There’s some legitimate questions on whether the publisher can continue to produce hit games after losing the Bungie relationship and seeing King struggle to expand beyond Candy Crush. Blizzard is often reliable, but even that is in question now.

The other initiatives outlined in “alternatives” above are also looking more questionable. The momentum behind the Overwatch League seems to have slowed some and there don’t appear to be any other major video game movies in the pipeline.

Total Score: 13

Not a great score, to be honest. And as I made clear above, it’s a score that has dropped since I originally purchased Activision Blizzard. I don’t like to make panic moves, and this honestly feels like a low point where all of the bad news is already baked into the stock, so I’m not selling now, but the company is definitely on my watch list to keep an eye on. Management needs to show that they have a response to Fortnite or can create successful non-Candy Crush based mobile games or have some other type of interesting IP in the pipeline or else it might be time to re-evaluate Activision Blizzard’s presence in the Freedom Portfolio.