Electronic Arts (NASDAQ:EA) stock faces a crucial test as the company reports earnings on July 30 after the market close. The gaming giant saw its stock slide as its core gaming audience moved more away from the PC and console-based games that have supported the company.
Now, Electronic Arts stock trades in a range, and the company needs a catalyst to reinvigorate its stock. Until it again produces games that resonate with its community, EA will struggle to deliver returns.
Earnings and Revenue Declines Predicted
For the company’s first-quarter, analysts forecast consensus earnings of one cent per share. If this holds, it will represent a 93.3% decline from the same quarter last year, when the company earned 15 cents per share. Wall Street also predicts revenues of $719.18 million. This comes in 4% lower than the $749 million the company brought in last year.
This comes at a time where the EA stock price now stands at just under $90 per share. It has risen modestly from December lows. However, it remains well below the highs above $135 per share that it saw last summer.
Given the 93.3% drop in earnings, investors have to ask, “what happened?” Many like to blame Fortnite, the immensely popular game released by privately held Epic Games.
Our own Ian Bezek believes the company has “lost its way” for reasons unrelated to Fortnite. According to him, the company releases “sequel after sequel” without regard to what their customers want. The reaction to Apex Legends appears to confirm that argument. Also, to Brad Moon’s point, It does not help that the company lost the right to use Cristiano Ronaldo in its FIFA 20 release. The FIFA series represents about 14% of total EA revenue.
Industry Changes Could Pass EA By
Moreover, EA stock, as well as long-time peers Activision Blizzard (NASDAQ:ATVI) and Take-Two Interactive (NASDAQ:TTWO), have suffered because gaming itself has changed. Much of the industry has switched to mobile gaming, yet these three companies seemed slow to adapt from their console and PC-based business model.
As Mr. Bezek stated, gaming grows at an 11% rate, while non-mobile gaming has grown at a 2%-3% rate. This positions upstarts such as Glu Mobile (NASDAQ:GLUU) and Zynga (NASDAQ:ZNGA) as well as more established tech companies to grab increasing market share.
Not all agree. James Brumley believes the massive selloff in EA stock served as a “wake-up call” to the company. He has now taken a tentatively bullish stance.
This goes back to my point in a recent article. To succeed with EA stock, one needs to understand electronic gaming itself. Unfortunately for my trader friends, understanding charting and price-to-earnings (P/E) ratios do not count. To succeed, one needs to play and understand the games themselves. If EA’s games again resonate with investors, it will bode well for Electronic Arts stock.
Should I Buy EA Stock Going Into Earnings?
Long story short, I see no reason to buy EA stock before earnings. The equity had recovered from the December lows by February. With the disappointment of Apex Legends and the continuing threat coming from mobile, it has done little since then.
However, to my point, I think intimate industry knowledge carries more importance with electronic gaming stocks than with oil, retail, or the tech industry in general. Put simply, what sells with the gaming community will sell with investors. Those that can know what games resonate with the gaming public can more often predict the behavior of EA stock and its peers.
To that point, Epic Games probably misses out by not trading publicly. However, today, Electronic Arts seems to miss out on a more fundamental level. Unless and until that changes, I would avoid EA stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.