Few people doubt that video games are a hot industry. Unfortunately, individual companies within the sector, including Electronic Arts (NASDAQ:EA) and rival Activision Blizzard (NASDAQ:ATVI), have been a hot mess. Last year, Electronic Arts stock dropped over 25% as the company suffered multiple setbacks and controversies.
One of the company’s biggest product headwinds was Battlefield V. After years of compelling storylines and groundbreaking gameplay from the franchise, anticipation exploded skyward for the latest iteration. Unfortunately, the company couldn’t meet users’ expectations. First came the bugs that frustratingly disrupted the user experience. Next, players discovered to their chagrin that EA made unnecessary changes to popular gaming modes.
While the EA stock price stormed ahead in the first half of 2018, the wheels of Electronic Arts stock came off in the second. Despite consistently meeting analysts’ earnings expectations, management delivered poor guidance. That pessimism continued into the holiday season, heaping further pain on the embattled organization.
But after this disaster, I was hopeful that all the bad news was priced into Electronic Arts stock. I might be wrong.
If any gaming investment could use a fresh start, it’s EA stock. But after its recent launch of a new franchise, “Anthem,” we’re again listening to the same old tale: Anthem is technically a brilliant title, but its gameplay is unnecessarily frustrating.
The company’s struggles are head-scratching on so many levels. Business Insider’s Ben Gilbert noted that EA spent significant time and money on Anthem. But in Gilbert’s words, what remains “missing is a soul.” He clarifies his point, criticizing the “generic gameplay” and pointless engagements.
With so many years and dollars invested in the franchise, EA committed an unforgivable gaming sin: it released a boring title. Naturally, I question how long Electronic Arts stock can weather such self-inflicted wounds.
A Surprising Hit for Electronics Arts Stock
If EA stock represents all that went wrong with gaming last year, Epic Games is everything that went right. Its standout release, Fortnite, became a pop-culture phenomenon, attracting casual gamers, celebrities, and everyone in between.
What makes Fortnite astoundingly disruptive is its free-to-play (FTP) format. Unlike EA, Activision Blizzard, or Take-Two Interactive Software (NASDAQ:TTWO), Epic probably didn’t spend lavishly on its flagship product. Instead, the company focused on creating a broadly attractive title and it took off like wildfire.
In contrast, EA spent countless hours and multiple millions of dollars on Battlefield V and Anthem, but obtained comparatively marginal results. That’s the ugly truth that casts a dark cloud over Electronic Arts stock.
But the fact that Epic didn’t spend lavishly on Fortnite is also positive for Epic’s competitors. That’s because, logically, we can surmise that the catalyst for this popular title wasn’t a large amount of resources, but rather, something free and duplicable.
To counter Fortnite’s rapid momentum, EA released its own FTP title called Apex Legends. Although an afterthought relative to the company’s heavyweights, Apex nonetheless delivered the goods. Just 72 hours after its release, over 10 million players had signed up, including one million people who played the game at the same time.
Better yet, EA finally dented Epic in ways other organizations haven’t, bolstering the case for Electronic Arts stock. Specifically, commentators have praised Apex for being a better, player-friendly version of Fortnite. Naturally, many Fortnite regulars have made the switch to the upstart rival.
Moreover, EA introduced a “ping system” for Apex, which facilitates superior communication among players. It’s such a standout feature that Fortnite did something unprecedented: its developers copied the system.
By itself, this is not momentous: game developers frequently steal ideas from each other. But it’s also a tacit admission by Epic that Fortnite is ever-so-slightly losing its magic touch.
Too Early to Tell?
For investors, what matters most is the bottom line. In that area, the tremendous popularity of Apex has produced tangible results. Shortly after management detailed the game’s initial success, the EA stock price jumped by double-digit percentage levels on the day.
Of course, the obvious counterargument is that it’s too early to tell if Apex can go the distance. Its rival still maintains a formidable presence, with over 200 million players. Additionally, Fortnite generated more than $1 billion from in-game purchases, a weak spot in EA’s armor.
While Electronic Arts stock is speculative, I still think it provides investors with a viable opportunity. If FTP is all that stands between a mediocre game and a blockbuster, watch out! When it comes to first-person shooter games, EA is still one of the best in the business, despite its misses.
Also, gaming trends come and go. While Fortnite has enjoyed explosive overall growth, recent engagement levels indicate that its popularity has peaked. As a result, Apex Legends is the new kid on the block, generating the infatuation that Epic previously commanded.
But moving forward, I think the difference-maker is that Electronic Arts is the proven commodity. With its vast resources and keen eye for technical development, it can build off this surprising hit. It just needed a good kick in the rear to incentivize it to find its motivation.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
