The video game stocks are trying to stabilize, and in some cases, they have. Take-Two Interactive Software (NASDAQ:TTWO) has been in a steady march higher for months now, despite the volatility in the overall market. Can Electronic Arts (NASDAQ:EA) get there too? Investors in EA stock are hoping so, particularly with the recent developments on the charts.
While EA is not approaching new highs like Take-Two, it is starting to put together a solid base and pushing over a few key levels. Its recent performance is about in-line with Activision Blizzard (NASDAQ:ATVI), with both stocks up about 5% over the past month.
However, over the past three months, EA stock is up less than 2%, compared to ATVI’s 20% rally. Throw in the ~24% rally by TTWO in the same time, and EA has vastly underperformed its peers. The question is will it change?
Valuing EA Stock
EA is operating in its fiscal 2020 year, just like TTWO. Analysts expect 8% earnings growth this year, followed by an acceleration to 10.2% growth in fiscal 2021. On the sales front, estimates call for 4.8% growth this year and 6.6% growth in 2021. All four estimates top the expectations for TTWO, with the exception being revenue growth in fiscal 2020. TTWO estimates call for 30 basis points of stronger growth, with estimates standing at 5.1%.
At 20 times this year’s estimates, EA stock isn’t screamingly cheap. But with the share price down over $57 from the highs (or about 38%), the risk/reward has changed. Let’s dig deeper.
With current assets of $5.8 billion and current liabilities of just $1.65 billion, EA can easily meet all of its short-term obligations. Total assets of $9.75 billion are nearly triple the total liabilities of $3.26 billion. Again, this signals that EA’s balance sheet is far from a risky proposition. Among its peers, EA has the best quick ratio, signaling a strong balance sheet.
Where it loses some points though is free cash flow (FCF). The company has $1.45 billion in trailing FCF, lagging ATVI but trumping TTWO. However, TTWO has rapid FCF growth, while EA’s growth is stagnant with FCF up just 3% over the last three years. ATVI has the worst growth of the bunch (a 2% decline over the past year and a 22% fall over the past three), although its $1.74 trailing FCF total is the largest sum.
When it comes to price-to-FCF, EA stock is in the middle of the pack at 19.6. TTWO stands at 16.6 and ATVI at 22.5.
Trading Electronic Arts Stock
Above is a short-term daily chart and below is a longer term weekly chart. Both highlight the situation happening with EA stock price.
As you can see above, Electronic Arts stock has been trapped in a tough downtrend channel (blue lines). However, the $88 level has held steady as support and the stock recently reclaimed all of its major moving averages. That’s good news for bulls. But what would be even better news is a move over channel resistance.
However, if it can eclipse this level, higher prices may be in store. That includes the July high near $103.50, as well as range resistance near $105. The latter can be seen on the chart below.
Also working against the stock right now? The 50-week moving average. So again, if EA stock can make a move over these downtrend marks, a solid rally can take hold. If it can push to range resistance near $105, it will represent a gain of $11 per share, or a gain of almost 12%.
If it gets there, it may have to contend with the declining 200-week moving average as well. Unless it decisively pushes through, I would expect this area to act as resistance on the initial test.
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.
