Greed is good, according to Wall Street’s iconic Gordon Gekko. But it can also stir up quite a bit of anger. This seems to be the case with Electronic Arts Inc. (NASDAQ:EA). Simply put, the company went too far in its efforts to monetize its games. And the result is that the EA stock price has taken a hit.
At the heart of the controversy is the Stars Wars Battlefront 2 title. You see, EA made it exceedingly difficult for players to unlock key characters like Dark Vader and Luke Skywalker. Essentially, the alternative was to fork over $80 bucks!
It did not take long for the internet to boil over. Keep in mind that the situation got so intense that the holder of the Star Wars license, Walt Disney Co (NYSE:DIS), got concerned about potential harm to the brand. Even CEO Robert Iger intervened.
In light of all of this, it should be no surprise that EA caved in and put a temporary halt on the in-game mechanics. But of course, the damage was already done. For the month so far, EA stock has lost over $3 billion in market value.
EA Stock And Microtransactions
It’s tough to gauge the ultimate impact of the Stars Wars Battlefront 2 game on EA stock. Let’s face it, there are likely millions and millions of people who really do not care at all. Rather, they just want to play a cool game, right?
For example, KeyBanc Capital Markets analyst Evan Wingren has noted:
“We view the negative reaction to Star Wars Battlefront 2 (and industry trading sympathy) as an opportunity to add to Electronic Arts, Take-Two, and Activision Blizzard positions. The handling of the SWBF2 launch by EA has been poor; despite this, we view the suspension of MTX [micro-transactions] in the near term as a transitory risk.”
He has a $134 price target on EA, which implies 27% upside.
There are also some other offsetting factors to consider. First of all, the gaming industry is undergoing a major transformation. Game developers are bypassing traditional middlemen, such as GameStop Corp. (NYSE:GME), to deliver games directly to customers.
This not only means heftier margins but also stronger connections with the customers, who are likely to remain loyal to a game for longer periods of time.
Next, the larger operators like EA have critical advantages. In today’s market, customers want immersive games that almost resemble feature films. This means a developer must have licenses to top-notch content and strong engineering teams.
As for EA, the company has been able to build a enviable portfolio of franchises like the Sims, Madden 17, FIFA and NBA Live.
Bottom Line on EA
On a relative basis, the stock does look cheap, with the price-to-earnings multiple at 29X. By comparison, Take Two Interactive Software Inc (NASDAQ:TTWO) is at 66X and Activision Blizzard, Inc. (NASDAQ:ATVI) trades at a multiple of 42X.
This may not mean much, at least for the short-run, because there is likely to be a cloud of uncertainty. All in all, whenever there is a threat to the business model things can get very dicey. And yes, this could make it tough for EA stock to get much traction.
Besides, the growth rate of the company has already been fairly sluggish, and this could easily worsen as the monetization methods are tightened up.
So for investors, it’s probably best to hold off now and wait for a better price on EA stock. It seems reasonable as there will be more bad news as the company rethinks its strategies.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.