Electronic Arts (EA) looks to have its second huge hit in as many months, and that should support EA stock as it continues a market-crushing run this year.
It’s been a terrible year for equities, but not for EA stock. Shares in the video game publisher are up 45% for the year-to-date, even as the broader market is off a painful 7%.
Strength ahead of the all-important holiday selling season isn’t unusual for stocks like EA, but this thing has been in blast off mode for almost a year. This week’s launch of FIFA 16 should keep it that way.
EA stock was already enjoying the benefits of its August launch of Madden 16, which garnered the franchise’s best reviews in five years. Longer-term, the stock has been getting support from the continued growth of next-generation consoles.
(Xbox One and Playstation 4 launched almost two years ago, but the console upgrade cycle is seven years, so it takes a while for new hardware to make a big impact on game sales.)
And now FIFA 16 is set to kick a cracker for EA stock in an otherwise strong year. Analysts note that the soccer games gets a Metacritic score of 84 after averaging the reviews for both the PS4 and Xbox One editions — that beats last year’s rating of 82.
EA Stock Fundamentals Look Good
Electronic Arts has other things going for it beyond these new successes in sports games. Shares remain reasonably priced given their growth prospects, and EA does historically well in the first part of December, as traders look for obvious Christmas plays.
As for valuation, investors are willing to play 20 times forward earnings for EA stock. That’s an unusually small premium to pay for a growth rate of close to 18%.
The valuation is also essentially in line with EA stock’s five-year period, most of which occurred before the launch of the next-gen consoles.
Meanwhile, analysts’ discounted cash flow models are spitting out some appealing price targets. Wall Street’s median target price for EA stock stands at $80. That implies upside of about 16% in the next 12 months or so. That’s a return any investor would take in today’s market.
On the downside, EA stock isn’t a holding that necessarily lets you sleep well at night. It’s extremely volatile compared with the broader market. Additionally, more than 6% of the float is sold short. True, that can set up a short squeeze on better-than-expected news, but it also shows that bears have conviction on this name.
Be that as it may, EA has two key hits ahead of the critical holiday selling season. If nothing else, blind excitement and performance chasing should make EA stock a solid tactical play through the year-end.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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