All video game publisher stocks have dropped in response to this macro video game market weakness Electronic Arts (NASDAQ:EA) stock included. Electronic Arts stock presently trades nearly 30% off its 52-week highs, but there’s a good reason.
The video game industry has had a rough few months, as a lack of catalysts (no new consoles and not many new great games) has converged on consumption headwinds (everyone is pivoting to free-to-play games) to create a material drag on video game spend in 2019. Year-to-date, U.S. video game spending is down 4%.
This weakness in Electronic Arts stock won’t last for long, mostly because broad weakness across the video game industry won’t last for long, either. Come 2020, the video game industry will benefit in a big way from new console launches, the introduction of cloud gaming, and a robust new game line-up.
As the video game industry bounce back in 2020, Electronics Arts stock will bounce back doubly so, since:
1) the company has optimally exposed itself to all on the industry’s biggest growth trends, and
2) EA stock trades at a historically cheap valuation.
Net net, the time to buy EA stock is now, when it’s on sale. Over the next 12 to 18 months, the fundamentals here will dramatically improve. As they do, the sale on EA stock will end, and shares will surge higher.
The Video Game Market Will Improve in 2020
There are two parts to the EA stock bull thesis. First, while depressed today, the video game market will meaningfully improve over the next 12 months. Second, EA has optimally positioned itself to win big as the video game market does bounce back.
The video game market has had a rough run in 2019. Year-to-date, video game spend in the U.S. is down 4% as consumers haven’t really had a reason to spend big on video games. There haven’t been that many new games, and the new games that have launched recently, haven’t been that good. Further, there aren’t any new consoles out there. Broadly, the market has become somewhat stale.
This staleness will be replaced with rejuvenated enthusiasm in 2020. The industry’s two biggest hardware players, Playstation and Xbox, are set to launch new consoles in 2020. That’s a big deal. The current generation of consoles (the PS4 and Xbox One) are eight years old. Thus, there are eight years of pent up demand here for the next generation of Playstation and Xbox consoles set to launch in 2020, meaning that consumers will likely upgrade their consoles in droves, driving growth across the whole industry in 2020.
Further, while the 2019 game line-up is largely forgettable, the 2020 game line-up projects to be really, really good. So good, in fact, that IGN put out a piece recently titled “Forget 2019, the Games of 2020 Look Amazing“.
Even further, cloud gaming will become a mainstream and widespread reality in 2020. The emergence of cloud gaming should drive interest in the video game space materially higher. Current gamers will probably game more. Old gamers may come back into the picture. Net-net, it will provide a big benefit to engagement.
In the big picture, then, new console launches, a strong game line-up, and the emergence of cloud gaming will breathe life back into the video game industry in a big way in 2020.
EA Is Positioned to Win Big in 2020
Onto to the second part of the bull thesis on EA stock, Electronic Arts has optimally positioned itself to win big in 2020 as the video game market bounces back.
First, consumption trends in the gaming world are shifting from “let’s pay for this video game” to “let’s play these equally cool games online, for free”. The emergence of free-to-play games has had a materially negative impact on paid video game publishers, like EA. But, EA has adapted. They’ve launched their own free-to-play game, Apex Legends, which was a huge hit when it launched in early 2019. Management said the second season launch in July has gone even better.
Thus, EA has appropriately adapted to the free-to-play trend and is ready to win big even if free-to-play continues to take share from paid games.
Second, EA’s product line-up has secular appeal. Between franchises like FIFA, Madden, and Star Wars, EA’s games have been loved by consumers for a long time, are still loved by them today, and will continue to be loved for the foreseeable future. Thus, as the video game market bounce back in 2020, EA’s sales should bounce back, too.
Third, EA’s gaming portfolio if optimally levered to 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.
Overall, EA stock looks ready to run higher in 2020 because this is a high-quality company with visible growth catalysts in a market that is ready to surge back to life.
Bottom Line on Electronic Arts Stock
Now is the time to buy Electronic Arts stock. Because the current video game environment is depressed, EA stock is trading at a relative discount (20-times forward earnings today, versus a five-year-average forward multiple of 23).
The video game environment won’t remain depressed forever. Instead, it’s gearing up for a big year in 2020. Thus, between now and the end of 2020, EA stock will likely move significantly higher.
As of this writing, Luke Lango was long EA.
