Gaming companies like Electronic Arts (NASDAQ:EA) stock got killed by Fornite which is partly owned by Tencent Holdings Limited (OTCMKTS:TCEHY). It is a free game that produced billions in sales and caused a ruckus in the world of gaming.
Electronic Arts stock fell 50% starting in July and bottoming with the equity markets in December. It almost did a double bottom retest in February but that was a successful retest of support.
Management seemed helpless. After all how could it battle a free game that is this popular? The answer was simple — join the wave. Since EA created the Apex Legends game, the stock went off to the races.
EA Stock and Apex Legends
Apex Legends was a departure from EA’s usual marketing hoopla. The statistics that resulted from the quiet release were a complete surprise to every one. They now have millions of players and each one is an opportunity for an up-sell to contribute to the EA stock bottom line.
The sharp fall in the stock last year created a fundamental reason to own the shares. While it’s not dirt cheap at 22 trailing price-to-earnings ratio, the future looks a lot brighter now that they have a way to compete with the elephant in the room.
This is a similar situation to companies like Adobe (NASDAQ:ADBE) migrating to the subscription service model rather than continuously chasing sales of new releases. I bet that EA management will be replicating this going forward as Apex Legends’ contribution to their bottom line grows.
This also opens the door for new revenue streams. So, those who want to own a piece of the gaming opportunity can now own Electronic Arts stock with confidence for the long term.
However, today’s opportunity is more tactical than fundamental. The upside benefit of this success of the new game is the positive action in the EA stock.
Year-to-date, EA is up almost 30%, which is more than double that the performance of the S&P 500. But for the past 12 months, it is down 20% and lags the indices by about 25% points. So clearly there is a catch-up trade opportunity.
Since the December bottom, EA stock stock has embarked on an ascending trend line of higher low as it closes in on a neckline of resistance. This usually creates the opportunity for a bullish breakout.
If the buyers can break out of the $109-per-share area, they could overshoot to target $128. This would close the open gap from last August. But there are a few lines of resistance along the way at $105, $110 and $117 per share.
To capture this potential, I can hold the stock with a tight stop below recent support. Depending on preference and portfolio balance, I would sound the first alarm below $96.50 per share. If that fails then there should be a support zone around $91 per share, plus or minus $1. Other than that, I see no reason for sellers to retest the February lows.
Most urgently, there is a tight three day range between $101 and $104.70 that will act as the catalyst to the breakout we seek. For those who don’t want to jump the gun I’d set an alert for the crossing of either edges and chase the opportunity I want.
Those who know how to use options can find hundreds of other ways of getting long EA stock with very little out of pocket risk. For example, selling puts or put spreads is one way to generate income if the stock holds its levels or rallies. I can even use the funds from the puts to buy shares or call options on them.
But there is reason to be cautious here. After all we are still facing macroeconomic headline risk that we still face from BREXIT and global tariffs.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.