Electronic Arts (NASDAQ:EA) stock fell in morning trading despite an earnings and revenue beat. The Silicon Valley-based gaming company has seen its once high-flying stock fall deep into bear-market territory since the previous earnings report.
Now, with lowered revenues stemming in large part from a delay in the Battlefield V release, EA stock will not receive the catalyst it needs to establish a floor. Given the continuation of bad news, investors continue to avoid EA stock for now.
Analysts Expect Lower Profits, Consistent Revenue
The company reported fiscal-second-quarter earnings of 98 cents per share on an adjusted basis. This blew away the earnings per share (EPS) of 58 cents per share Wall Street had expected for EA stock. The company reported a loss of seven cents per share in the same quarter one year ago. EA also earned revenues of $1.22 billion. They had expected revenues of $1.18 billion, the same amount brought in during the year-ago quarter.
Unfortunately for holders of EA stock, earnings guidance bolstered the equity’s continued weakness. The company forecasts third-quarter revenue of $1.73 billion. Analysts had expected $2 billion. This also hurt revenue forecasts for the year. The company now expects to bring in $5.2 billion for the fiscal year, down from the expected $5.55 billion. As a result, EA stock fell by almost 4% in morning trading.
Relentless Selling of EA Stock Defined the Last Quarter
This continues a downtrend that began soon after EA stock hit its 52-week high of $151.26 per share in July. Later that month, the stock began to slip following the previous earnings report when the company guided lower on revenues. Electronic Arts stock now trades around $91 per share, a loss of almost 40% in just three months.
This drop takes its price-to-earnings (P/E) ratio to about 19.7. Analysts predict lackluster growth of 4.3% this year. However, they also forecast 16.5% growth next year and 12.7% average annual growth over the next five years.
Do Not Try to Fight the Herd on EA Stock
If not for the momentum, I would look to buy at these levels. However, investors have thus far found the game of “Find the Bottom” more challenging than a game of SimCity or Fifa Online. In early September, our own James Brumley called EA stock a “buying opportunity” for those investing for the long term. While his suggestion made sense and could very well prove correct in the long run, the freefall has continued.
Unfortunately, negative emotions now drive the narrative on this stock. Until recently, positive sentiment drew investors into Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) despite triple-digit P/E ratios. That same type of emotion has turned negative, and now sellers continue to unload EA stock despite P/E ratios below S&P 500 averages. Like on the upside, fighting the tape on the downside can also lead to losses. Also, stocks that trade near 52-week lows tend to keep reaching new lows.
Hence, I agree with Luke Lango that EA stock will need a catalyst to break the trend. While Mr. Lango speculated that this report could serve as the catalyst, that did not come to pass. However, predicting such turning points usually proves difficult. For this reason, I would continue to avoid Electronic Arts stock for now.
Final Thoughts on EA stock
The lowered earnings guidance means the negative sentiment that has driven EA stock down will continue to hammer the equity. Electronic Arts stock had performed well until the July earnings report began a brutal round of selling. Now, with the stock more than 40% of its value in the last three months, EA looks like a buy.
However, despite its low valuation, relentless selling of the stock continues. Since investors tend to lose money fighting the herd, prospective buyers need to watch and wait. I agree with my colleagues that EA stock should become a great buy at these levels. However, until Wall Street cares more about fundamentals than negative sentiment, investors will better serve themselves by staying away.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.