From early 2018 to early 2019, Electronic Arts (NASDAQ:EA) stock went on a roller coaster ride from $100, to $150, to $80, and then back to $100.
From January to July 2018, EA stock price rallied from $100 to $150 on the idea that the video-game industry was firing on all cylinders, and that EA was set for a record 2018 holiday season. That didn’t happen. The video-game industry cooled in the back half of 2018, and EA botched its holiday-game lineup. Consequently, EA stock price fell from $150 in July 2018 to below $80 by the end of 2018. Electronic Arts stock subsequently rebounded in early 2019 after EA successfully jumped into the trending free-to-play, Battle Royale arena with Apex Legends.
The wild roller-coaster ride of EA stock has calmed down significantly over the past several months. Ever since the Apex Legends catalyst in early February, EA stock price has been rangebound between $90 and $100. That’s nearly five months, marking the longest period of sideways trading in the normally volatile Electronic Arts stock since the period from late 2016 until early 2017.
That era of sideways trading ended with a huge rally by EA stock in mid-2017. I think Electronic Arts stock is due for a similar large gain soon.
It increasingly appears that EA’s fundamentals will dramatically improve over the next several months, supported by a strong game lineup, the reinvigorated growth of the entire video-game industry, and accelerating eSports and cloud-gaming tailwinds. As the company’s fundamentals improve, EA stock should shake out of this sideways trading slump and shoot higher by the end of 2019.
My numbers suggest that $110 is a fair 2019 price target for this stock, indicating that the shares can rise a solid 10%-plus over the next several months.
The Fundamentals of the Video-Game Industry Will Improve Soon
The video-game industry has entered a slump. So far in 2019, video-game spending is down 3% year-over-year, including a 17% decline in hardware sales and a 2% increase in software sales.
That slump won’t last long. Looking ahead, there are three major catalysts which should supercharge growth across this industry by late 2019 and into 2020.
First, new Xbox and Playstation consoles are coming out in 2020. New console launches always provide a lift to video-game hardware and software sales. But these new consoles should provide an exceptionally large lift, mostly because they are being hyped as far better than their predecessors. Thus, the new consoles should provide a large lift to the video-game market.
Second, in the back half of 2019, a few cloud-gaming platforms are set to appear on the market. By 2020, more cloud-gaming platforms will have been launched. So over the next 12 months, cloud gaming is set to go from a dream to a reality, and that pivot should increase engagement in and sales of video games.
Third, the eSports catalyst remains alive and well. Recent developments have been positive for eSports. Las Vegas is getting more involved in eSports. ESPN now distributes awards to eSports participants. and eSports are also coming to the X Games. All these positive developments underscore that eSports’ growth should remain positive for the foreseeable future.
The video-game industry is in a slump right now. But the slump won’t last long. By the end of 2019, the video-game industry should be firing on all cylinders.
Electronic Arts Stock Is Poised to Surge
As the video-game industry comes back to life over the next 12 months, Electronic Arts’ growth should similarly accelerate because this company has high-quality exposure to the entire video-game world.
First and foremost, EA has a solid game lineup in the pipeline. Coming soon are new launches of FIFA and Madden, two games which are big hits for this company every year. After that, EA is set to launch Star Wars Jedi: Fallen Order, ahead of the big-screen release of the final movie in this most recent Star Wars trilogy. The timing synergies between those two releases almost ensure that Fallen Order will be a big hit.
Second, EA has successfully pivoted into the free-to-play Battle Royale arena and is set to expand its reach in that market. EA’s free-to-play Battle Royale game, Apex Legends, was a huge hit in early 2019, attracting 25 million players in the first week and 50 million players over the first month. The hype surrounding the game has since faded. But Apex Legends season 2 is set to launch in early July, and that game should be quite popular as well.
Third, EA’s gaming lineup is ideal for eSports. Many of EA’s games – from FIFA to Madden to NHL – are designed around competition among players and therefore lend themselves perfectly to eSports tournaments. Thus, as the eSports industry grows over the next several years, EA should grow with it.
As the video-game industry returns to growth over the next several months, so should Electronic Arts. That return to growth should spark a healthy rally by EA stock.
The Bottom Line on EA Stock
The forward earnings multiple on EA stock presently sits at 21. That is 40% off the stock’s valuation at its 52-week high and 10% off the stock’s average valuation of the last five years. Thus, relative to both the past year and the past five years, EA stock presently trades at a discount. That’s because EA’s growth is presently below normal.
That below-normal growth rate won’t last for much longer. Over the next several months, the video-game industry will resume rapid growth, and so will EA. As that happens, the valuation of EA stock will return to normal levels.
As a result, EA stock price should head higher over the next several months, sparked by a combination of profit growth and multiple expansion.
As of this writing, Luke Lango was long Electronic Arts stock.
