As a leader in the video game industry, Electronic Arts (NASDAQ:EA) develops and distributes esports games. Its top franchise titles include FIFA Online, SimCity, The Sims and Battlefield. EA will report earnings on Feb. 5, after the close, for the fiscal quarter ending December 2018. So what kind of price performance can we expect from the company around its earnings release? And will EA stock ultimately be a buy before its earnings are revealed on Tuesday?
A darling among investors through the end of 2017 and early 2018, Electronic Arts stock had a rough second half of the year in 2018. EA stock’s 52-week price range has been between $151.26 (July 13, 2018) and $73.91 (Dec. 26, 2018). Despite the run-up in price in January, long-term investors would be better off waiting for the release of the earnings report before hitting the “buy button”.
Short-Term Headwinds for EA Stock
Subscription-Based Monetization: In July 2018, the company announced that it would be slowly moving its business model to recurring subscriptions. Its higher-end subscription, called “Origin Access Premier,” now gives customers early access to the latest EA games at the cost of $15/month or $100/year.
Although analysts see potential to increase customer numbers through a subscription-based monetization model, this earnings report will give investors a better idea as to whether EA will manage to become the Netflix (NASDAQ:NFLX) of gaming. Any doubts over management’s ability to deliver strong results in 2019 could dampen investor sentiment and result in a selloff in Electronic Arts stock.
Mobile Revenue Growth: During 2018, the company reported slowing mobile revenue growth. This decline has alarmed the investment community, as the global mobile games market is growing about 25% annually. EA, which was one of the pioneers in mobile gaming, cannot afford to fall behind the competition in this crucial growth segment. On the other hand, Activision Blizzard (NASDAQ:ATVI), one of EA’s main rivals, has shown strong performance in mobile growth.
Worries Over China: The U.S.-China trade war brought dark clouds over the markets in 2018. Then later in the year, investors began wondering if the cracks in the Chinese economy were also more extensive than initially anticipated.
Recently, China released data that showed a slowing economy and President Xi Jinping highlighted the fact that as the country moved toward a consumer-led economy, it faced deep and complicated changes.
The past few weeks saw market giants like Apple (NASDAQ:AAPL) and Nvidia (NASDAQ:NVDA) issue earnings warnings, mostly due to deteriorating macroeconomic conditions in China. These companies have also expressed concern over the adverse effect of a strong U.S. dollar on Chinese sales. As a result, Wall Street is stressing that if China catches a cold, many other stocks and the rest of the world will not be left unscathed.
In the summer of 2018, EA credited the release of FIFA Mobile in Asia with offsetting revenue decreases in other categories. Its launch coincided with the summer World Cup in soccer, as well as the game’s rising popularity in China. EA partnered with Tencent Holdings‘ (OTCMKTS:TCEHY) WeChat social media platform to distribute FIFA Mobile in China. However, Wall Street needs to see further numbers from China to gauge whether this initial success will continue in 2019.
Short-Term Technical Analysis
Like many other technology stocks, in January, EA stock was up almost 20%. For those investors who pay attention to short-term technical charts, EA’s momentum indicators, which describe the speed at which prices move over a given period, are currently in overbought territory. Although these indicators can stay overbought for quite a long time, short-term profit-taking might be around the corner.
In other words, any robust earnings news is possibly already priced into the share price and unless the numbers and 2019 guidance are exceptional, investors may decide to take their profits for now. After the upcoming earnings call, if you still believe in the bull case for Electronics Arts stock, then you might consider waiting for a better time to buy, such as when the price of EA shares is around the low-$80’s, or even mid-$70’s.
The Bottom Line on Electronic Arts Stock
Electronic Arts is one of the largest gaming companies by revenue and it has plenty of strong franchise titles.
If you already own EA stock, you might want to hold your position. However, within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 5-7% below the current price point.
New investors are likely to benefit by waiting for the company to release its quarterly results this week, paying close attention to the balance sheet.
Expect near-term trading to be choppy at best until the volatility in the broader market decreases. Ultimately, EA stock will need to stabilize and build a base again before a long-term sustained leg up can occur.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.