3 Reasons to Believe in the Contrarian Case for EA Stock

Despite all the noise, video-game manufacturer Electronic Arts (NASDAQ:EA) and EA stock has always had one ace up its sleeve: its core revenue-generating industry. Many of the younger InvestorPlace readers may not remember a time when video games represented the exclusive domain of partner-less nerds. I speak from personal experience.

3 Reasons to Believe in the Contrarian Case for EA Stock

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Of course, the gaming marketplace is very different today. According to a recent industry report, 65% of American adults play video games. Moreover, the average age is 33 years. From the perspective of stakeholders of Electronic Arts stock, this rising demographic trend is extremely positive.

How so? Back in the nascent stage of video-game consoles from Nintendo (OTCMKTS:NTDOY) and Sony (NYSE:SNE), parents would scream at their children to put down their controllers and finish their homework. Again, I speak from personal experience. Now, parents are playing alongside their children.

With the gaming industry having attained mainstream credibility, the EA stock price should be on fire. However, several gaming stocks performed poorly last year due to a myriad of headwinds, including even geopolitical ones. Naturally, this has dampened the environment for EA and rivals like Activision Blizzard (NASDAQ:ATVI).

Still, investors should take solace in that Electronic Arts stock appears to have stabilized. Moreover, the company beat its earnings and revenue expectations for its fiscal fourth quarter of 2019. While one report doesn’t change the entire narrative, it’s a far cry from Q3’s disappointing take.

Here are three more reasons why contrarians can believe in EA stock:

Management Can Fix What Went Wrong

Last year was an unusual one. Conspicuously, the Trump administration started to lose credibility in foreign affairs. That’s an issue that the former real-estate mogul harped on during his campaign for the 2016 election.

A consequence of the spiraling affairs in the White House was the U.S.-China trade war. That eventually sparked a severe correction in the broader markets. I mention this because looking back in hindsight, Electronic Arts stock would have suffered irrespective of management’s decisions.

But that doesn’t excuse EA’s top-level executives which made some unforced errors. Key among them was the Battlefield V mishap. Prior to launching the full retail version of the game, EA released a teaser-trailer during a gaming conference. Fans immediately complained about Battlefield V’s historical inaccuracies, which was set in World War II.

Management insisted that the fans were wrong, even mocking them at one point. They forgot the cardinal rule of business: the customer is always right.

I don’t need to dive into the gory details. Suffice to say, Battlefield V was an incredible disappointment, badly hurting the EA stock price.

But here’s the good news: presumably, the worst of the damage is over for Electronic Arts stock. Now, the leadership team just needs to concentrate on fixing what went wrong.

If you think about it, that’s the easy part: they must cease silly unforced errors. Furthermore, they should concentrate on what has always worked in any industry: give the customers exactly what they want.

Apex Legends Delivers the Goods for EA Stock

Speaking about fulfilling consumer desires, a discussion on EA stock is incomplete without mentioning Fortnite. Seemingly out of nowhere, this upstart first-person shooter (FPS) turned the broader gaming sector upside down.

Personally, I found this phenomenon difficult to understand. Companies like EA and ATVI have dominated the FPS market with increasingly realistic graphics and gore. Fortnite, with its bright, cartoonish graphics, was almost a slap in the face to industry protocol. Yet everybody was talking about it, while the established giants faded into the background.

Obviously, that also negatively impacted Electronic Arts stock. However, in this regard, management demonstrated that they’re learning lessons from the battlefield (pun intended).

Their online FPS title, Apex Legends, encompasses the core elements that made Fortnite a hit: free to play, and utilizing an improved version of “battle royale” mode. When it launched, Apex was an immediate success. More recent indicators suggest that nothing in that characterization has changed.

Best of all, Fortnite’s vaunted user growth is finally slowing. Between November 2018 and March 2019, registered users gained 25% to 250 million. That rate pales in comparison to between June 2018 to November 2018, which was 60%.

Love It or Hate It, EA Owns Sports Gaming

In some ways, Electronic Arts is a drug dealer. Every year, they release essentially the same game but with prettier graphics. Oh, and some new feature that may or may not resonate with fans. They get away with it because the consumer base is addicted.

When it comes to the company’s EA Sports division, the old rules (i.e., the customer is always right) don’t apply.  Since EA owns the most lucrative sports licenses — NFL and FIFA — discerning sports fans have few alternative options.

I don’t see management ever giving up this cash cow, which offers multiple esports synergies. Therefore, I’m inclined to believe the turnaround narrative of EA stock.

As of this writing, Josh Enomoto is long SNE.

Article printed from InvestorPlace Media, https://investorplace.com/2019/06/3-reasons-to-believe-in-contrarian-case-for-ea-stock/.

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