Here’s Where To Go All In on Electronic Arts Inc. After Rebound

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EA stock - Here’s Where To Go All In on Electronic Arts Inc. After Rebound

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Shares of Electronic Arts Inc. (NASDAQ:EA) have done well this year, despite crumbling from $120 in late-October to $100 in early December. Now that EA stock price has bounced back though, should we hop on board?

First, let’s talk about the issue that caused EA stock to fall in the first place.

As you’ll see on the chart below, EA stock momentum has been waning since August. Although shares were steadily trading between $115 and $120 for several months, it’s clear momentum wasn’t on EA’s side.

The initial drop in late-October was a result of the company’s earnings report and ill-received guidance. However, shares sank further in mid-November due to customer backlash over the micro-transactions in EA’s new Star Wars: Battlefront II game. Investors dumped the stock in droves on concerns that Star Wars wouldn’t be in demand among gamers. The company briefly suspended its in-game purchases as a result.

Once the miniature tech selloff in early December began, EA stock finally (and briefly) fell below $100. So what do we do from here?

Holiday Sales and EA Stock

Recent reports have put Call of Duty: WWII at the top of this season’s video game sales list. In fact, it’s now the sales leader for all of 2017 and has generated the best launch month for the franchise since 2012. While that bodes well for Activision Blizzard, Inc. (NASDAQ:ATVI), don’t rule out Electronic Arts just yet.

When it comes to November video game sales, Star Wars came in at No. 2, Madden at No. 5, FIFA at No. 7 and Need for Speed: Payback at No. 8.

To say Electronic Arts did well would be an understatement. The gamemaker has two games in the top five and four in the top ten. For the record, Activision only had two in the top ten (Destiny 2 came in at No. 9), while Take-Two Interactive Software Inc (NASDAQ:TTWO) had just one.

So while it may be easy to look at EA stock and shrug it off, I think its holiday sales will do really well. In fact, those same reports said overall video game sales were up 30% year-over-year for November. That goes back to the same drum we were beating a few weeks ago: the economy.

Don’t rule out how strong the economy is doing and how high consumer confidence is. No, we don’t have 4% to 5% GDP growth. But all we really need is for consumers to feel like the economy won’t fall into a recession next quarter — that their house won’t be foreclosed on and that their job won’t disappear anytime soon. Then they’ll renovate the house and spend on holiday gifts.

Video gamemakers are a direct beneficiary of that and November’s data shows it.

Trading EA Stock Price

I have not hid from my liking of ATVI stock. While none of the gamemakers are particularly cheap at current valuations, one can justify buying them, thanks to the industry’s tailwinds. The stay-at-home economy — benefiting Netflix, Inc. (NASDAQ:NFLX), Apple Inc. (NASDAQ:AAPL) and others like downloadable games, micro-transactions and e-sports leagues — are all big-time drivers for sales, earnings and margins.

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

On the EA stock chart though, there are a few negative developments. First, EA stock broke below major $105 support. Second, if it’s going to break down that far, the least it could do is fill the gap near $97, which it didn’t. Finally, the 50-day moving average (blue) is gearing up to cross the 200-day moving average (red) to the downside. That’s known as a “death cross” in technical analysis and it’s a bad sign for bulls.

While those issues are certainly a concern, there are positives as well. First, EA stock had a violent rally to get from $100 to $110. Although shares are retreating from those highs, it’s very positive to see it over $105. Second, the MACD is finally positive (blue circle). This suggests that momentum is turning bullish, a good sign for bulls.

The trade then is simple: Buy EA stock and stay long over $105. From here, we’re looking for a bounce back to $115 to $120. Below $105 and we’ll be out. Those who want to use a longer leash can use a stop-loss below recent lows near $100. EA has a great secular trend and strong seasonality to drive solid results.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a long position in ATVI.

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


Article printed from InvestorPlace Media, https://investorplace.com/2017/12/where-go-all-in-electronic-arts-inc-ea-stock-after-rebound/.

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