It’s been a nasty ride for Electronic Arts (NASDAQ:EA), with shares still well off the highs it logged last July. Down near $95 now, the stock is still more than 35% below its highs north of $150. With earnings due May 7, investors want to know whether EA stock is worth owning.
Compared to its peers, Electronic Arts stock has been doing pretty well, although that’s not saying much. Over the last six months, the stock is up 91 basis points, compared to a decline of 23% for Take-Two Interactive (NASDAQ:TTWO) and a 29% decline for Activision Blizzard (NASDAQ:ATVI).
However, over the past year, EA is down about 20%. That trails TTWO’s 4.7% loss, but is better than the 27% loss ATVI stock is sitting on.
The recent outperformance gives some confidence to bulls that perhaps EA’s momentum over its peers can continue. That said, the video game industry is clearly struggling right now.
The question is whether investors will turn their sights to fiscal 2020 (beginning now for EA stock) or if they will continue to punish the company for its current situation.
Valuing Electronic Arts Stock
When Electronic Arts reported its fiscal third-quarter earnings in February, it missed on earnings and revenue expectations. It also cut guidance. This news crushed the share price, but EA posted a wicked bounce just a day later on impressive user data surrounding its new game, Apex Legends.
Built in a similar format to the incredibly popular Fortnite, investors are crossing their fingers that EA’s new game can help lift the company out of its slump.
On May 7, EA will report its fiscal fourth-quarter earnings. With in-line results, analysts are looking for full-year earnings of $3.93 per share, an 11% year-over-year (YoY) decline from $4.42 per share a year earlier. On the revenue front, consensus expectations call for a 7.7% YoY decline to $4.78 billion.
These results will matter, but not as much as management’s outlook and tone. The company should issue guidance for fiscal Q1 2020, as well as the full year. Currently, estimates for the latter call for earnings of $4.45 per share on revenue of $5.14 billion. In-line guidance would suggest growth of 13.2% and 7.4%, respectively.
Unfortunately, we can’t predict how EA will do on earnings or what management will say on the call. Even if we could, most seasoned investors will tell you that even with the news in hand, it’s near impossible to predict how the stock will react.
That’s why we outline levels ahead of the event to trade after the fact.
Trading EA Stock
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A couple things are clear to me on the two-year weekly chart for Electronic Arts stock. The first is that $92.50 has been short-term support so far in 2019. This level was resistance in January, but has played a support role since. The other notable level to my eye is $105. This level served as support in 2017, didn’t play much of a role in 2018 and has been resistance so far in 2019.
To me, this is the mark that EA stock must reclaim on earnings if bulls want to see significant upside. While this would represent a gain of 10.5% from current levels, clearing this level is necessary for larger gains in 2019.
To get there though, EA stock will have to hurdle the 20-week moving average, as well as downtrend resistance. Should it do so and get above $105, it will have to contend with the 50-week moving average at $108. Electronic Arts stock doesn’t have to blast through all of these levels at once, but testing them and eventually pushing through them would be healthy.
What wouldn’t be healthy? A close below $92. That gives EA stock about 3% of leeway from current levels, which isn’t a lot of room for error when it comes to earnings announcements. But below this level and EA will be below the 200-week moving average and key range support. That opens the door to its February lows and possibly more.
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.
