There More Room to Grow for EA Stock, but Not a Lot

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Electronic Arts (NASDAQ:EA) has moved slightly higher in recent weeks, with EA stock adding about 1.5% in the last month and almost 20% year-to-date.

There More Room to Grow for EA Stock, but Not a Lot
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Optimism about new releases in its core franchises as well as an upcoming upgrade cycle in consoles has helped to boost the stock, a trend that appears poised to continue. It will also help that the industry overall recover from the massive stock swoons of last year.

However, gaming continues to evolve as new venues and platforms gain popularity. Now the question becomes not if EA will rise, but can it command higher multiples in the current gaming environment?

EA Stock Tailwinds

As with its peer, Activision Blizzard (NASDAQ:ATVI), EA saw a massive slump last fall. However, in the case of EA, the drop occurred more quickly. This led to a decline closer to 40%, instead of the 50% drop ATVI experienced. A recovery from the mid-$70s per share level to about $108 per share by March occurred almost as fast.

However, while ATVI has moved higher, EA stock has merely moved from the bottom levels of the range established earlier this year.

EA has not commanded the higher valuation of its main peers, Activision and Take-Two Interactive (NASDAQ:TTWO). Still, many have become more optimistic. As David Moadel mentioned, Piper Jaffray set a price target of $122 per share.

The buzz surrounding a new generation of gaming consoles for 2020 has driven much of this sentiment. Manufacturers first released the current generation of consoles in 2013. This will undoubtedly give gamers a reason to buy the latest games in EA’s stronger franchises such as “FIFA,” “Madden,” or “Battlefield.” New releases such as “Star Wars Jedi: Fallen Order” also show promise.

Electronic Arts Has Room to Grow

EA stock currently trades at a forward price-to-earnings (PE) ratio of about 18.7. Analysts expect an earnings growth rate of 8% this year and 10.2% next year to bolster this multiple.

Given the upcoming upgrade cycle, I expect some increase in the stock from here. I think the question traders need to ask is whether this is a longer-term investment or merely a trade?

Given the competition, I lean toward the latter. That is not to say that EA will underperform. Barring a recession, I see little downside. The question hinges on whether we will see significant upside in the near-term. There, I feel less convinced.

I see Piper Jaffray’s $122 per share price target as achievable. However, the stock peaked at almost $140 per share about one year ago, significantly higher than the Piper Jaffray target. Given the industry headwinds, I think it could take years to return to that all-time high.

Gaming has changed since 2013 when manufacturers released the last generation of consoles. The industry has bifurcated in many respects. Competitive video gaming has become more popular. However, the more serious gamers use PCs instead of consoles due to their faster speeds.

On the other end, games on smartphones and tablets like the ones made by Glu Mobile (NASDAQ:GLUU) and Zynga (NASDAQ:ZNGA) have become more popular. EA has also jumped upon this trend. Still, their core franchises revolve around the console, a machine many will increasingly see as unnecessary.

I expect this latest generation of consoles will still sell, albeit at lower levels. I also think that will reinvigorate the company’s stronger franchises, and by extension EA stock. However, with the choices gamers have, I do not see how Electronic Arts stock will command a significant valuation premium.

The Bottom Line on EA stock

Traders have reasons for optimism. The question is, how much? EA, much like Activision and Take-Two, has recently benefitted from tailwinds. EA has long held some valuable gaming franchises, and updates will likely sell well. Moreover, a new generation of gaming consoles will further boost sales.

However, the industry has become more competitive, specifically because of the rise of competitive gaming and smartphone and tablet-based games. Neither of these trends bode well for the console, the machine which EA core franchises revolve around.

EA stock should rise in the short-term. However, if multiples do not expand significantly, I would also not find that surprising.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/ea-stock-room-to-grow/.

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