It’s been a super volatile run, not just for Electronic Arts (NASDAQ:EA), but all of the video game stocks. Just a day after getting hammered on disappointing earnings, Electronic Arts stock began to climb aggressively on positive chatter surrounding its new game, Apex Legends. That chatter has only gotten better, with the game now eclipsing 50 million users in just 30 days.
It’s helping EA outperform its peers like Take-Two Interactive Software (NASDAQ:TTWO) and Activision Blizzard (NASDAQ:ATVI). The latter of those two, Activision, has just about everything going wrong for it. Conversely, TTWO has some solid momentum from its top game Red Dead Redemption 2, while EA has the most momentum at the moment. The question is, can that momentum continue?
How Far Can Apex Legends Go?
Recently video game stocks hit a “perfect storm” of negative catalysts. First, they came into the fourth quarter red-hot, with many trading at or new all-time highs. Around the same time, Chinese regulators began censoring which video games the public could play and given the size of that market, it put a damper on video game stocks. Further, Nintendo (OTCMKTS:NTDOY) was riding strong Switch momentum.
Finally, and perhaps most problematic, Epic Games (40% owned by Tencent (OTCMKTS:TCEHY)) was disrupting the world with its Fortnite game, which hit 200 million users across all of its platforms before the end of 2018.
That’s exactly the response that Electronic Arts is looking for with Apex Legends. Or even more. With the game’s 50 million users in 30 days, EA is outpacing the initial growth from Fortnite. If that growth can continue and if EA can eclipse the 100 million mark before the second half of 2019, investors will bid up Electronic Arts stock even more.
While games like Apex Legends and Fortnite don’t generate revenue on the initial sale of the game, they do generate revenue with low-priced in-game purchases. Many gamers loathe micro-transactions, but they are much more willing to shell out $2 here and $5 there if they didn’t have to pay for the game to begin with.
Getting 100+ million users on board and then living off micro-transactions isn’t the worst business plan in the world. In fact, it’s simply a digital version of the old razor/razor blade model. If Electronic Arts can gain traction with Apex Legends, EA stocks can gain traction too.
The Bottom Line on EA Stock
Not everyone is aboard the Apex Legends train. There are a lot “ifs” still out there and concerns over its longevity. Cowen analysts point out that gamer interest is waning, with streaming on Twitch (owned by Amazon (NASDAQ:AMZN) now) falling from ~271.2K viewers to just 132.3K viewers. Conversely, Fortnite has increased from 114.6K to 149.9K.
That said, Baird analysts say that with Apex Legends’ 50 million active users and average revenue per user of $20, that it could join Fortnite as the only two free-to-play games to hit $1 billion in sales in their first 12 months.
That’s pretty solid and if the developers can keep interest levels high among gamers, it can garner even more momentum.
Trading EA Stock
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A look at the chart above shows just how volatile of a ride it has been for EA stock. After falling from ~$93 to sub-$80 after earnings, EA eclipsed $100 just three days later, a rally of more than 25%! The stock has worked its way lower in recent weeks, as Electronic Arts digests the big move higher.
Negative headlines about Apex Legends and other industry developments will likely weigh on EA. Conversely, positive headlines will aid the stock price. I don’t like trading headlines, such as with Fed announcements or the trade situation between China and the U.S.,but that’s the situation we have right now with EA.
Should Electronic Arts stock fall below $92.50, I really want to see $90 hold. Both the 50-day and 100-day moving averages are near this mark and maintaining above this area would be encouraging. North of $90 and $93 also keeps EA above key Fibonacci retracement levels from the post-earnings range as well.
Over short-term downtrend resistance (purple line) and the bulls can gather some momentum. Below $90 and some red flags will start to pop up on the charts.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
