3 Reasons the Electronic Arts Inc. Stock Rally Is Just Getting Started

The ride for Electronic Arts stock is only just beginning

By Laura Hoy, InvestorPlace Contributor

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EA Stock Is Melding Real Sports and eSports

Source: King of Hearts via Wikimedia (Modified)

The past month has been a bumpy one for video game creator Electronic Arts Inc. (NASDAQ:EA). The firm released its much-anticipated Star Wars Battlefront II game at the end of 2017, but gamers weren’t impressed by the company’s decision to include in-game purchases.

The negative backlash over the game’s shortcomings caused EA to turn off the in-game purchases. While gamers were pleased, investors pulled away from Electronic Arts stock worrying that the removal of in-game monetization would cut down significantly on profits.

The ordeal took EA stock significantly lower, but the firm has since rebounded as investors returned to Electronic Arts believing that negativity over the Star Wars game was overdone. Most of the losses from the Star Wars backlash have been recouped, and now Electronic Arts stock is trading around $112 per share. That begs the question, is EA stock still a buy, or is the rally over?

Digital Sales Tailwind

What made Electronic Arts stock a buy a few months ago still holds true today, even in light of outrage over the company’s latest game release. Electronic Arts has a lot of growth potential, and the firm will likely benefit from the gaming industry’s shift from physical games to digital downloads.

Now that gamers can download rather than purchase actual games, companies like EA are able to improve their margins because they don’t have to invest in disks or pay to transport those disks to distributors. Speaking of distributors, it also cuts out the need for a third party. So Electronic Arts can now sell directly to consumers and pocket the entire game revenue.

Another huge reason investors are excited about digital sales is the potential for in-game purchases. Of course, what happened with Star Wars a few weeks ago doesn’t shine a great light on the idea, but eventually adding purchase options in games will become the norm.

Also, many of the complaints about Star Wars conveyed a sense of being “cheated” by Electronic Arts. The company will have to rethink the placement and cost of in-game purchases, but hopefully this ordeal will be a learning experience for the future.

eSports

Perhaps the most compelling reason to buy Electronic Arts stock over some of the firm’s peers is the fact that EA owns some of the most popular eSports gaming franchises on the market. The company’s Madden and FIFA games have been big hits, and their appeal has drawn in all types of gamers from novices to professionals.

Over the past decade, we’ve seen gaming go from a hobby to something much larger. The potential competitions and events that Electronic Arts may be able to hold through its eSports games means the firm is right in the middle of that evolution.

Electronic Arts is planning to grow its competitive arm significantly in 2018, but in a way that its peers aren’t. While gaming tournaments typically require participants to join a professional league, EA is opting instead to allow people to play as “walk-ons” at a local level.

That means they can move up by winning tournaments locally, and eventually make their way into regional and national competitions. This approach pairs well with the way sports games are played anyway. And it’s likely to draw in more participants because it gives casual gamers a chance to throw their hats in the ring.

Strong Q3

Electronic Arts is due to report its third quarter results at the end of January, and the figures are likely to impress. EA has a track record of producing consistent cash flows and strong financials. The third quarter will probably be no exception.

As the shift toward digital sales continues, EA’s margins will likely rise, and the Star Wars incident will take a back seat. Although Electronic Arts is no longer receiving the in-game revenue that the firm originally hoped for, analysts don’t think that’s going to make a huge dent.

Not only that, but EA has a lot of big names due to come out in fiscal 2019, which will begin in April. Some heavy hitters like FIFA World Cup and Titanfall 3 will likely help boost the firm’s revenue. Many analysts believe that current expectations for the performance of those games are too low.

The Bottom Line on Electronic Arts Stock

Electronic Arts stock suffered briefly last year when its new game didn’t quite live up to expectations, but the worries about its financial impact on the company were likely overdone. In any case, the Star Wars debacle doesn’t change the firm’s impressive long-term growth trajectory, making EA stock a buy.

As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/3-reasons-the-electronic-arts-stock-rally-is-just-getting-started/.

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