Should You Buy Electronic Arts Stock on the Dip?
Electronic Arts (NASDAQ:EA), a leader in the video-games industry, is well known for developing and distributing e-sports games. A darling among investors through the end of 2017, EA stock has had an especially volatile second half of the year. Despite a price decline of over 5% in 2018, investors would be better off waiting some more before they invest in Electronic Arts stock.
Will EA’s Subscription-Based Business Model Deliver Growth?
On July 30, Electronic Arts announced that the company would be slowly moving its business model to recurring subscriptions. Its higher-end subscription, called “Origin Access Premier,” now gives customers early access to the latest EA games at the cost of $15/month or $100/year.
Although analysts see potential to increase customer numbers through a subscription-based monetization model, it is still too soon to say whether EA will manage to become the Netflix (NASDAQ:NFLX) of gaming.
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Are the Fundamentals Still Intact?
On July 26, Electronic Arts reported quarterly results and beat earnings estimates. It showed that its top franchise titles, including Fifa Online, SimCity, The Sims and Battlefield, performed well. However, EA kept its earnings estimates for the whole year the same, meaning management was expecting weakness in the upcoming quarters.
The company also reported slowing mobile revenue growth. This decline alarmed investment community, as the global mobile games market is growing over 25% annually. EA, which was one of the pioneers in mobile gaming, cannot afford to fall behind competition in this crucial growth segment. On the other hand, Activision Blizzard (NASDAQ:ATVI), one of EA’s main rivals, has shown strong performance in mobile growth.
And China?
During the July earnings call, company CFO Mr. Jorgensen credited the recent release of FIFA Mobile in Asia with offsetting revenue decreases in other categories. The launch of FIFA Mobile coincided with this summer’s World Cup in soccer, as well as the game’s rising popularity in China. EA has partnered with Tencent Holdings‘s (OTCMKTS:TCEHY) WeChat social media platform to distribute FIFA Mobile in China. However, Wall Street would need to see further numbers from China to gauge whether this initial success will continue in 2019 too. During the July earnings call, there was also concern over the adverse effect of a strong U.S. dollar on Chinese sales.
Short-Term Technical Chart
Following this earnings call, investors have been punishing EA stock — the price has since fallen from the $150’s to the mid-$90’s. EA stock’s 52-week price range has been between $96.10 (Oct. 24, 2018) to $ 151.26 (July 13, 2018). After investors’ harsh response to the quarterly results, the stock has suffered from a damaging technical picture. Its short-term technical chart still looks rather weak, pointing to potential new lows in the price. Those investors who pay attention to moving averages and oscillators should note that EA’s technical message is a “sell”. Within the next two months, I expect Electronic Arts to trade between $105 and $75.
The Bottom Line on Electronic Arts Stock
Electronic Arts is one of the largest gaming companies by revenue with strong franchise titles.
Long-term investors are likely to benefit by waiting for the company to release its quarterly results next week, paying close attention to the balance sheet. Any doubts over management’s ability to deliver strong results in 2019 could dampen investor sentiment further.
After the upcoming earnings call, if you still believe in the bull case for EA stock, then you might consider waiting for a better time to buy, such as around a share price in the mid to low $80’s. Expect near-term trading to be choppy at best until the volatility in the broader market decreases, probably towards the end of the year. EA stock will need to stabilize and build a base again before a long-term sustained leg up can occur.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
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