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Electronic Arts Inc. Stock Might Have a Drop More Upside

Bret Kenwell

Earlier this week, Electronic Arts Inc. (NASDAQ:EA) reported its fiscal fourth-quarter earnings results. After beating expectations, EA stock erupted to new all-time highs. But can investors expect even more upside in 2018?

Analysts are applauding the quarter, raising price targets left and right since the report. The average post-earnings price target rests at $145.70. That implies about 9% further upside from current levels.

The highest price target, from Wedbush Securities, sits all the way up at $158, implying almost 20% upside from current levels.

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EA Earnings

EA’s results follow that of Activision Blizzard, Inc. (NASDAQ:ATVI), which had a somewhat bizarre release. Earlier this month, shares suddenly fell intra-day, dragging down EA stock and Take-Two Interactive Software Inc (NASDAQ:TTWO). At first, it wasn’t clear why ATVI shares were diving 5% in the middle day on seemingly no news.

Then it was clear: ATVI’s quarterly results were accidentally released during the trading session.

The report was pretty good and the selloff was likely more in reaction to the unexpected release rather than the actual numbers. You know investors hate surprises. It resulted in a great buying opportunity.

As for EA? Bookings in the quarter jumped almost 15%, which was solid. Earnings per share and revenue came in ahead of expectations, while guidance was good but not blowout. For fiscal 2019 (current year), management expects sales of $5.6 billion along with operating cash flow of $1.825 billion, up about 8% from 2017.

For next quarter, management provided guidance of $1.08 billion. Some analysts have said this guidance appears conservative and by the way the stock is trading, investors are thinking the same thing.

Valuing EA Stock

After grinding through 2017, calendar 2018 is full of opportunity for EA stock. Analysts have high hopes for Electronic Arts stock, with consensus estimates calling for 9% revenue growth and 17% earnings growth.

For this, we’re paying a rather reasonable 26.6 times this year’s earnings. Some may find this expensive, and to some extent it is. Heck, EA stock is more expensive than Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) or Facebook Inc (NASDAQ:FB) with a lower growth profile.

But video game makers are enjoying a strong, secular theme that has little reason to slow anytime soon. Gamers are aging, but they’re not putting their controllers down. That bodes well for video game stocks, as does the business of in-game content.

No longer do game-makers rely solely on initial sales. They can create content packs, new maps and new characters. Even though the sale price on these add-on items tends to be low, they have high margins.

Here’s what Blake Jorgensen, COO and CFO, said in the press release:

“Our success is driven by the way we have changed, and continue to change, our relationship with players. They want more depth in their favorite games, and fresh content that can hold their attention year-round. This has made our business much more stable and enabled us to deliver a dependable and growing cash flow to investors.”

EA’s success in engagement can be seen in this stat right here (bold emphasis added): “Nearly 18 million players engaged in competitive gaming across FIFA 18 and Madden NFL 18, up more than 75% year-over-year.” That’s a pretty big move for franchises that already have a pretty entrenched user base.

A $2.4 billion share buyback, good for 6% of outstanding stock at current levels, also helps.

Trading Electronic Arts Stock

Earnings pushed EA stock over a multi-month resistance level at $130.

chart of EA stock after earnings

Click to Enlarge

We looked at Electronic Arts stock after that move and here’s what we saw on the charts. This was our take:

“The trade here is a simple one: Over $130 and short-term bulls want to own EA stock. Long-term investors and even bullish swing traders will want to buy between $115 and $125, a wide range for sure, but one with tons of support. I wouldn’t bother shorting this one, unless it’s a short-term break below $130. But overall, EA is a ‘no thanks’ for me on the short side.”

The $130 level has held as support on the back of several bullish trading sessions in the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) and S&P 500. So by and large, we’re sticking with our original observations. Traders can look to squeeze out some more upside, while long-term investors can gobble up EA stock on pullbacks.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a position in GOOGL. 

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