To put it mildly, Electronic Arts Inc. (NASDAQ:EA) is not having a great month of March. After recovering from a gaming controversy earlier this year, EA stock was poised to build on its momentum. Instead, the famous game maker is in damage-control mode, hoping to salvage something after Tuesday’s vicious 5% selloff.
In all fairness, no gaming company escaped the bloodbath unscathed. Key rival Activision Blizzard, Inc. (NASDAQ:ATVI) shed 5.4%, while Take-Two Interactive Software, Inc (NASDAQ:TTWO) dropped 4.9%. A common explanation was that Fortnite, a new mobile gaming app, has unexpectedly stolen the top dogs’ thunder. As a result, they’re scrambling to find answers.
Unfortunately, Electronic Arts has to deal with the consequences of its own unenforced errors. Back during the release of its highly anticipated Star Wars Battlefront II title, EA included a dreadfully unpopular in-game transaction system. For gamers that wanted to skip ahead, they could purchase access to special characters or enhanced attributes.
What’s the problem with this, you might ask? Nothing, except for a small but significant detail: the purchases were based on a “lottery system.” That is, Battlefront players couldn’t directly purchase the attributes they wanted. Instead, they had to rely on chance, essentially forcing uber-fans to pay more money than they normally would.
Fans were rightfully ticked off, and EA stock suffered. Despite almost immediate corrections, the stench of this error remains. Thus, about two weeks ago, Electronic Arts announced a complete redesign for Battlefront II.
Which is just as well. Unlike its predecessor, sales of the latest Battlefront have been somewhat disappointing. During the holiday quarter, the Star Wars-based action game sold nine million units against a forecast 10 million.
Still, I wouldn’t get too worked about these small details.
EA Stock Is a Winner in a Losing Market
Please don’t get me wrong — I’m not saying that you should haphazardly buy EA stock, especially under these circumstances. The market, particularly the technology sector, is suffering a serious corrective phase, and it could get worse. This is the catalyst for EA’s current woes, not because of competitive pressure or a past mistake.
However, I consider this moment to be a longer-term opportunity. As I stated in early February, one of the best strategies for dealing with a down market is to buy good companies stuck in bad situations. Right now, EA stock is a proven winner in a losing market. Once the major indices stabilize, you’ll want to have some exposure to Electronic Arts.
The key ingredient that has made EA so ridiculously successful is sports licensing. Let’s just be real — many of us as kids wanted to be professional athletes, but we lacked the talent. That’s why we’re doing whatever it is that we’re doing. EA’s magic is that they deliver us the fantasy of being a pro athlete without the rigorous training involved.
Granted, that fantasy was particularly weak using yesteryear’s technology. But today, the tech has improved so dramatically that video games themselves have become a professional sport. Esports tournaments have sprouted worldwide, which is a big boost for EA stock. If you want to play with real players against real teams in real stadiums, Electronic Arts is your only avenue.
You should also consider that Electronic Arts sometimes transcends the actual sporting league. For instance, soccer in America has never been as popular as football, basketball or baseball. Yet EA’s FIFA soccer games are incredibly popular and have probably boosted interest in the actual sport. Also note that the World Cup is coming soon, and EA will release an upgrade to accommodate.
Be Patient With Electronic Arts
With all that said, the markets today are pure chaos, and we should expect a rough ride moving forward. Inevitably, the broader troubles will impact individual names.
Given the present circumstances, I wouldn’t buy EA stock right now. At the very least, I expect shares to lose most of this year’s gains, if not all. If the major indices really get ugly, I believe the bears will challenge the psychologically important $100 barrier.
I’m not saying this just based on technical interpretations. Video gaming has a huge following in Asia, and Chinese gamers love EA’s FIFA series. Since no one considers the current U.S.-China relationship anywhere close to favorable, Electronic Arts might see some volatility.
However, in the long run, the video game industry is too big and too popular to fail. Despite some missteps and setbacks, EA stock is still an incredibly resilient name. The only difference now is that you’ll eventually get it at a much cheaper price.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.