3 Reasons to Ride Electronic Arts Stock Above $100

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Following a late 2018 plunge which cut Electronic Arts (NASDAQ:EA) stock in half, shares of the video-game publisher have bounced back in 2019. So far this year, EA stock has risen  25% as investors gear up for what could be a blockbuster 2020 and 2021 for EA.

Source: Rick Neves / Shutterstock.com

The rationale for the coming rally of Electronic Arts stock is simple. A new generation of video-game consoles is hitting the market in 2020. It will be the first new console upgrade cycle since 2013. At the same time, cloud gaming will be integrated into these new consoles. The combination of new consoles  and cloud gaming will create a rising tide for the whole video-game industry.

In that rising industry, EA should be a star. The company’s portfolio of games is robust. EA has some big headline launches coming soon. Additionally, the company  has successfully pivoted into the free-to-play realm and is on the cutting edge of the eSports movement.

The video-game industry will surge tremendously in 2020 and 2021, and EA is poised to be a big winner in that hot industry. Consequently, EA’s growth rates should improve meaningfully over the next few years. That, in turn, should lead to continuous strong performances by EA stock.

I fully believe in this bull thesis. As a result, I think EA stock is worth buying now and for the next several quarters.

The Video-Game Industry Is About to Surge Tremendously

The most important point for EA stock  is that the video-game industry is about to grow like weeds over the next two to three years.

Let’s look at the big picture. Over the past decade, the video-game industry has grown steadily, as it’s been supported by non-cyclical trends such as digital engagement, competitive gaming, and increased mainstream publicity.

The sector has taken a step back in 2019, but this weakness won’t last. Growth will resume in 2020, driven primarily by new console launches.

The last generation of video-game consoles launched in 2013. In 2020, two new consoles — the Playstation 5 and Project Scarlett – will debut. Inevitably, given the long time between console upgrades, there will be huge demand for these new consoles.

On top of that, these new video-game consoles will be able to support cloud-based games. As a result, for the first time ever, cloud gaming will go mainstream in 2020. That’s big. A huge innovation, cloud gaming will cause demand to jump by attracting new gamers to the market and bringing old gamers back into the market.

Consequently, with new, cloud-gaming-enabled consoles launching in 2020, the entire video-game industry looks primed for rapid growth in 2020 and 2021. It also helps that the slate of new video games due to launch in 2020 is already being hyped as one of the best ever.

Electronic Arts Will Be a Star in a Rising Industry

As the video-game industry goes gangbusters in 2020 and 2021, Electronic Arts stock will be a huge winner.

That is based on a few ideas. First, EA’s games are second to none. Among its offerings are top franchises like FIFAMaddenAnthemBattlefield, and Sims. In 2020 and 2021,  EA will launch new, popular  titles. Those games, which will be launched against the backdrop of increased interest in video games thanks to new consoles, should sell quite well. As a result, EA’s revenue growth should accelerate meaningfully, creating a positive catalyst for EA stock.

Second, Electronic Arts has successfully pivoted into the free-to-play-game arena with its Apex Legends game. Thus, even though the video-game market remains challenged by free-to-play offerings, EA does not have that problem or, at least, it’s less impacted by the issue than its peers. That distinction should allow EA to fully reap the rewards of new console-inspired video-game market growth in 2020 and 2021.

Third, EA is a major player in eSports. It will remain a huge eSports player for the foreseeable future, since many of its franchises – FIFAMadden, and NBA Live – are great fits for competitive gaming. Thus, as eSports continues to gain traction in 2020 and 2021, EA’s overall growth should accelerate.

EA’s Fundamentals Should Lift Electronic Arts Stock

One could argue that, trading at 22 times analysts’ average earnings estimate, EA stock is already priced for blockbuster results over the next two years,

Sure, EA stock is more richly valued than the average growth stock. But that’s because its long-term growth outlook is better than that of the average growth stock.

EA should be able to drive 10%-plus profit growth over the next several years, with high-single-digit-percentage revenue growth and gradual margin expansion. As a result, EA’s profits can reach $6 per share of EA stock by fiscal 2022. Assuming the forward  price-earnings ratio of EA stock will be 20, the average for growth stocks, Electronic Arts stock will reach $120 in fiscal 2021.

Discounted back by 10% per year, that equates to a fiscal 2020 price target of about $110. We are a few months into EA’s fiscal 2020, and  Electronic Arts stock is trading below $100. Thus, over the next few months, the fundamentals indicate that EA stock should rally another 10%.

The Bottom Line on EA Stock

The video-game industry will surge tremendously in 2020 and 2021 , thanks to cloud gaming and the first wave of new consoles since 2013.In that red-hot video-game industry, Electronic Arts should be one of the stronger players, given its popular games, ample free-to-play exposure, and positive eSports catalysts. Finally,  EA stock appears to be undervalued today.

Because of those factors, I remain bullish on EA stock today.

As of this writing, Luke Lango was long EA. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/3-reasons-to-ride-electronic-arts-stock-above-100/.

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