Yes, Buy This Dip in Electronic Arts Shares
As if Electronic Arts (NASDAQ:EA) shareholders hadn’t been beat up enough, EA stock fell another 10% on Thursday. Coupled with the 16% selloff suffered over the course of the latter half of July, EA is now down 25% for the past month and a half.
It’s certainly not the way the video game company’s investors were hoping to end their summer.
And yet, for would-be investors waiting on the sidelines — biding their time waiting for an entry point — the plunge is most definitely an open window of opportunity to step into EA stock — even if it feels like you’re catching a falling knife.
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What Happened to EA Stock?
If you were looking forward to playing ‘Battlefield V’ by late October, you’re out of luck. The next iteration of the company’s popular combat-themed franchise has been delayed until Nov. 20. That’s still in time to capitalize on the all-important holiday shopping frenzy. But, it puts its release date a month after rival gamemaker Activision Blizzard (NASDAQ:ATVI) will release new versions of two of its most popular game series.
That delay also prompted Electronic Arts to lower its full-year bookings, akin to revenue, for the current fiscal year. Its previous bookings outlook of $5.55 billion was pared back to $5.2 billion, though only about $235 million of the $350 million adjustment is directly attributable to the delay of Battlefield V. The other $115 million is attributable to unfavorable foreign exchange rates.
The official statement from the company’s Chief Studios Officer, Laura Miele, explained “Tens of thousands of players have been hands on with the game so far, and we’ve been honored to receive best multiplayer awards at E3 and Gamescom. We’ve had valuable feedback from our community, and we’re going to take the time to make some final adjustments and deliver a great experience for our fans.”
Owners of EA stock, however, clearly saw the glass as half-empty rather than half-full.
Reality Check
The bad news clearly came at a time when Electronic Arts was dented and bruised, and less than well-positioned to shrug off such headlines.
Just a few days prior, a participant at one of its ‘Madden’ football game series’ tournaments shot ten fellow gamers, claiming the lives of two before he turned the gun on himself. EA has cancelled the rest of tournament. Though EA stock didn’t suffer a setback in response to the tragedy and most observers understand Electronic Arts’ could have done little to prevent it, the company is still connected to the event.
That news followed July’s fiscal Q1 report and Q2 guidance that was disappointing. Revenue and income both fell year-over-year, and the company’s bookings outlook for the quarter presently underway was underwhelming.
Still, Electronic Arts remains one of the biggest and most recognizable names in the video-gaming business … a business that’s getting bigger itself.
Game-industry research outfit Newzoo offered research earlier this year that video games would not only continue their unfettered steak of revenue growth for the foreseeable future, but see that growth acceleration. The outfit believes that this year’s projected revenue of $137.9 billion will grow at a compounded annual growth rate of 11% through 2021, when the gaming business should be worth just a hair more than $180 billion.
Electronic Arts along with chief rival Activision Blizzard, however, are part of only a small handful of outfits in the business in a position to turn a decent profit.
As for the delay of Battlefield V, it’s unfortunate, but not damning. The postponement will only push its revenue back to a subsequent quarter; it’s unlikely much (if any) revenue will ultimately be lost.
Indeed, the one-month delay may actually prove beneficial when all is said and done. The October release of Activision’s Red Dead Redemption 2 and Black Ops IV could have diluted sales of Battlefield V, with some would-be buyers opting not to purchase one or more of those three titles after the hype fades. By waiting another month, the excitement surrounding Activision’s games may have run its full course, setting the stage for a pre-holiday frenzy that puts Battlefield V in the spotlight all by itself.
Bottom Line for EA Stock
It’s not easy or comfortable stepping into any stock that appears to be in a freefall. And, unless an investor is committed to such a trade for the long haul, it may not be the right move.
In that Electronic Arts is one of the key leaders of a fast-growing industry though, and has proven it can broadly grow the top and bottom lines with a minimal degree of bumpiness, this pullback from EA stock is a buying opportunity despite the swell of pessimism.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
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