Here’s Why Electronic Arts Inc. Stock (and 2 Peers) Are Growth-Stock Buys

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EA stock - Here’s Why Electronic Arts Inc. Stock (and 2 Peers) Are Growth-Stock Buys

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Gamemaker Electronic Arts Inc. (NASDAQ:EA) has struggled over the past few months, with the EA stock price topping out near $122.50. However, it’s in a prime position to exceed investor and analyst expectations this quarter.

Electronic Arts isn’t alone among its video game peers, even though that’s our focus. Take-Two Interactive Software Inc (NASDAQ:TTWO) and Activision Blizzard, Inc. (NASDAQ:ATVI) are also in prime position to benefit going forward. So what’s going on in this business?

Secular Tailwinds for EA, ATVI and TTWO

The video game industry is one that simply won’t go away. In fact, it continues to build momentum. There were concerns at one point, such as the decline in physical retail would negatively affect sales. Ailing GameStop Corp. (NYSE:GME) highlighted this fear. Mobile gaming via tablets and smartphones was another worry.

But really, this couldn’t be further from reality.

Video game sales remain robust, while many of the major gaming companies have noteworthy mobile businesses, too. Thanks to advances in technology, consumers are able to go online and download video games rather than buy physical discs. Now, they can be downloaded directly to a user’s Microsoft Corporation (NASDAQ:MSFT) Xbox or Sony Corp.’s (NYSE:SNE) Playstation.

Think that boosts margins? Well, that’s not even the real kicker. Consider the companies’ in-game purchases. Those are the real margin boosters, as game companies are essentially banking on the razor-and-blades model. But instead of giving away the razor for free, they’re selling it for $60 to $100 and hoping to nickel-and-dime consumers for the blades. Not all bite, but enough consumers shell out $1 to $10 on these purchases to make it highly profitable for game producers.

As if immersive and high-def gaming wasn’t enough, it’s clear this “stay-at-home” economy has momentum. More consumers seem content with sitting at home, watching Netflix, Inc. (NASDAQ:NFLX) and playing games. For better or for worse, that’s the trend and it’s not dying anytime soon.

E-Sports Ascent

For those worried about physical activity, entertainment seekers are still showing up to stadiums. They’re not showing up to watch football or basketball, though. Instead, they’re going to watch e-sports championships and tournaments.

The best of the best meet to play EA’s Madden, Take-Two’s NBA 2K or Activision’s Hearthstone or Overwatch. These events draw spectators and players from all over — be it in person at Madison Square Garden or online via Twitch (owned by Amazon.com, Inc. (NASDAQ:AMZN)).

 

It’s not just a fad, though. E-sports has drawn some big-time sponsorships and colleges are even offering scholarships for their teams. Big-name owners are getting involved with the leagues, too. Comcast Corporation (NASDAQ:CMCSA) is an owner in Activision’s new Overwatch league. New England Patriots owner Robert Kraft and Los Angeles Rams owner Stanley Kroenke, among others, have also invested in the concept.

Do you think these people (and companies) would plunk down cold hard cash if they didn’t see a possible return on their investment? There’s far more growth left in e-sports, whether investors pay any attention to the trend or not.

Trading EA Stock Price

chart of EA stock price
Click to Enlarge
Source: Chart courtesy of StockCharts.com

So what do we do with these stocks? The “big three” — EA stock, TTWO and ATVI — are up 42%, 141% and 77%, respectively, so far in 2017. So expecting monster upside in the short-term is unrealistic. However, the price of both EA stock and ATVI stock have been consolidating for some six months or so, meaning they could be setting up for a larger move.

Consider this data point: Activision’s new Call of Duty game reeled in more than $500 million in sales in its first three days. That gives you a sense of the demand for gaming, particularly ahead of the busy holiday season. With a strong U.S. economy, I would expect all three companies to deliver better-than-expected results for the quarter.

Specifically, I like EA stock and ATVI, with EA’s chart on the right. A pullback to $105 to $108 should find support. The nearby 200-day moving average should help EA stock price too. ATVI has a similar setup, with support in the low-$60s. However, ATVI has already pulled back and investors might have to move into the mid-$60s to get a good price.

If the broader market can pull back a few percentage points, we should be able to nab these big winners on a decline into support. I prefer the basket approach — that is, owning two to three — versus picking just one. I expect strong results from all three.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/ea-stock-other-gamemakers-growth-stock-buys/.

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