Is Poor Reception of ‘Battlefront II’ a Reason to Sell Electronic Arts Inc. Stock?

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Video game publisher Electronic Arts Inc. (NASDAQ:EA) is set to launch its big holiday game, Battlefront II, in a few days. That launch has been looked at by many as the catalyst which will spring EA stock out of the sideways trading pattern which has dominated the stock since June. Battlefront II was the reason to buy EA stock this holiday season.

That isn’t the case anymore.

Is Poor Reception of Battlefront II a Reason to Sell EA Stock?

In fact, Battlefront II might actually now be a reason to sell EA stock.

Early trial users don’t like the game. At all. Critics aren’t in love, either. The big problems include pricey in-game content and a rushed single-player story line.

Meanwhile, the EA stock price is still stuck in its $105 to $120 trading range. The valuation feels maxed out considering growth prospects. It’s also still early in the holiday season, which has proven to be a difficult time to own EA stock.

So why buy? I’m not buying. I remain largely neutral on the name, with a slightly bearish skew given the poor early reception to Battlefront II.

The Problems With Battlefront II

The problems with Battlefront II are so big that CNBC ran an article about it recently.

The focus of that article was a Reddit thread which has been flooded with negative early response to Battlefront II. The negativity largely stemmed from outrage over how much certain in-game content costs. For example, in the game, certain hero players have to be unlocked either through extensive game-play or in-game purchases.

Those “hero players” include basic Star Wars characters like Darth Vader and Luke Skywalker. That is why the hottest topic on Reddit was a thread titled, “Seriously? I paid 80$ to have Vader locked?“, which racked up 3,000 comments before the thread was locked.

Amid this backlash, Electronic Arts has lowered some of those high in-game costs. Specifically, the cost to unlock certain hero players like Luke Skywalker and Darth Vader has been cut by 75%.

Almost certainly, that price cut will weigh on EA’s operational results. EA’s holiday guide was already weak, and that sent EA stock lower. Now, due to price cuts on high-margin in-game purchases, EA’s numbers will likely be worse than expected.

The Problems With EA Stock

Consumer backlash on the company’s headline holiday launch is the last thing EA stock needs.

It has been stuck in neutral since June despite peer Take Two Interactive Software Inc (NASDAQ:TTWO) shooting more than 50% higher.

Why? A tapped-out valuation.

EA stock trades at 26.3x fiscal 2017 earnings estimates. Earnings growth over the next two years is expected to be just 15%. That is a rather unexciting price-to-earnings/growth (PEG) ratio of about 1.8.

The market is trading at a PEG ratio of 1.9, while TTWO stock sports a PEG ratio of 1.7.

Plus, the free cash flow yield is at 4.3%. That is pretty low for this stock. At the beginning of the year, the free cash flow yield was above 4.7%. A year ago, it was around 4.8%.

Then there is the whole fact that November through January is historically a tough time for EA stock. Management almost always gives a conservative guide for the holiday quarter, and that hangs over the stock until the next earnings report at the end of January.

Bottom Line on EA Stock

Why pay more than 26x earnings for a stock that is historically tough to own during this time of year, is getting horrendous feedback on its headline holiday launch, and has been stuck in neutral since June?

EA stock won’t work this holiday season. The valuation is full, and sentiment is dour thanks to yet another weak holiday quarter guide. And the one reason to buy EA stock, Battlefront II, is quickly turning into a reason to sell it.

I don’t think EA stock will fall big from here. I just think it’s a sideways stock at best for the next several months. In this space, I strongly prefer TTWO stock.

As of this writing, Luke Lango was long TTWO. 


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/poor-reception-battlefront-2-reason-to-sell-electronic-arts-stock/.

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