Judging from the stats, video-gaming giant Electronic Arts (NASDAQ:EA) is enjoying a solid year. So far in 2019, EA stock is up nearly 18%. However, that figure hides the fact that for the most part, shares have traded in a frustratingly horizontal pattern.
Even more problematic, Electronic Arts stock recently experienced some worrying turbulence. Part of that is related to weakness in the gaming industry. Last week, rival Activision Blizzard (NASDAQ:ATVI) released its results for the second quarter. Unfortunately, the downbeat report has poor implications for competitors in the field.
Specifically, Wall Street took a dim view of Activision ringing up only $1.1 billion in revenue. In the year-ago quarter, the company produced $1.7 billion in top-line sales thanks to hits from its leading franchises like Destiny and World of Warcraft. With the deflated environment, analysts had measured expectations. Still, a 35% year-over-year loss was not on anyone’s radar.
That bode very poorly for EA stock. Prior to the recent escalation of the U.S.-China trade war, EA was targeting expansion into China. They already had a lucrative partnership with Chinese internet firm Tencent (OTCMKTS:TCEHY) on their free-to-play hit Apex Legends. With experts forecasting China’s gaming market to grow to over 700 million people, the country represents a must-hit target for Electronic Arts stock.
Back then, the geopolitical environment was a massive headwind. Now, the situation almost appears impossible to break through. Rising rhetoric from both sides makes a trade deal unlikely in the nearer term, which stymies EA stock.
Further, the weakening international currencies that negatively impacted ATVI will also hurt Electronic Arts stock.
EA Stock Levers Two Big Trump Cards
Despite my bullishness toward Electronic Arts stock, I must concede that recent developments make this an ugly play. Reasonably, most investors should downgrade EA as a speculative trade.
However, if you’re tolerant to risk, EA stock enjoys two trump cards that work synergistically with each other: the esports movement and professional-sports licenses.
First, let’s talk about esports. This term really represents gaming’s evolution. Initially, video games started out as solitary activities. But with advancing technologies, gamers were able to create an ecosystem for their shared passion. Eventually, this ecosystem transitioned into a bona fide economy.
For the first time this year, the global esports market will exceed revenues of $1 billion. In 2022, that figure will likely rise to nearly $1.8 billion. Invariably, EA stock will benefit because the underlying company owns some of the most popular gaming brands and franchises.
This segues into my second point about pro-sports licenses. In many ways, Electronic Arts has a legal monopoly because it owns the exclusive and lucrative NFL license. Put another way, if you want to run a pro-football based esports tournament, guess what? You must play Madden, and that means ringing the cash register for Electronic Arts stock.
As an aside, this is one of the reasons why many folks hate EA. Every year, they can forward modest improvements in game play, but demand a premium for an essentially rehashed product. But the important point here is, who’s going to stop them?
Additionally, Electronic Arts owns the license for FIFA, which is soccer’s governing body. Since soccer is the world’s most popular sport, an authentic esports soccer tournament will have to go through the gaming giant. Naturally, this is a huge boost for EA stock.
Don’t Forget Other Players!
In analyzing the global video game market, it’s easy to get tunnel vision on China. Of course, they have a population that’s four times that of the U.S. Furthermore, their love for digital technologies is patently obvious.
However, the Chinese are also unreliable business partners when it involves the broader entertainment industry. For instance, China is ground zero for content piracy. Thus, attaining revenue from them is always a tough challenge for content creators.
When considering EA stock, I also wouldn’t ignore other viable markets. For instance, western European markets combined offer robust revenue potential. Furthermore, India is transitioning into a billion-dollar gaming industry in its own right. Though the sector is incredibly challenged right now, there are still opportunities.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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