The novel coronavirus has been a headwind for the global economy at large. But, for some industries, such as video games, the pandemic has brought an unexpected windfall. And that’s the case for Electronic Arts (NASDAQ:EA). EA stock now trades above share prices before the pandemic first made headlines.
No surprises here. As our own Matt McCall recently discussed, video game usage soared after states issued “shelter-in-place” orders. With most leisure activities out of the question as Americans are forced to stay home, indoor entertainment options like streaming and video games have become the only game in town.
In short, expect Electronic Arts to post strong numbers when it announces results on May 5. But do strong earnings make shares a buy at today’s prices?
The stock has rallied from as low as $85.69 in late March to $114.26 per share at the close April 30.
Taking at look at other video game options, EA stock doesn’t look like the best play out there. Despite strong underlying fundamentals for the video game space, consider shares a “sell” heading into earnings.
EA Stock, the Pandemic and What’s Next
It’s safe to say the coronavirus has been a tailwind for the video game industry. According to NPD, sales of video game software in March climbed 34% year-over-year. As most stay-at-home orders remain in place, I would assume April will show strong results as well.
But how does this translate for EA stock? As shares rally higher in anticipation of strong near-term results, little has changed in terms of expected earnings for the quarter.
Consensus calls for the company to post 98 cents in earnings per share for the quarter ending March 31, 2020. That’s below results from the prior year’s quarter, of $1.31 per share. Yet with the recent surge in video game usage, it’s tough to believe the company won’t beat this forecast.
However, the current “stay-at-home” economy won’t last forever. Once things return to normal, will the company be able to post strong sales growth? Analyst consensus only calls for sales to grow around 3.2% between FY2020 (fiscal year ending March 2020) and FY21. Earnings growth projections aren’t too impressive, either. Earnings-per-share are only expected to climb 5.5% over the next fiscal year.
Can Electronic Arts Continue To Move Higher?
Does an unexpected boost in video game demand mean better-than-expected results for EA stock? That depends. As InvestorPlace’s Luke Lango recently pointed out, there are many reasons why shares could head higher. These include a strong library of franchises, along with exposure to growth in eSports.
But rivals like Activision Blizzard (NASDAQ:ATVI) and Take-Two Interactive (NASDAQ:TTWO) may be better video game stocks to buy. As a Seeking Alpha contributor recently wrote, out of the top 10 bestselling games of March 2020, none were from EA.
In other words, video games as a whole are doing well. But some companies are doing better than others. This could explain why Wells Fargo’s Brian Fitzgerald has “overweight” ratings on ATVI and TTWO, but only an “equal-weight” rating for EA. The analyst price target for the stock is $120 per share, signaling minimal upside for investors jumping in today.
Nevertheless, Fitzgerald is positive on the company’s sports franchises such as FIFA and Madden. According to the analyst, these titles could limit the chance of shares falling back to lower price levels.
My take? Given the choice between Electronic Arts and Activision stock, I’d go with the latter. Even with higher levels of projected growth, ATVI shares trade at a similar valuation.
EA stock sells for a forward price-to-earnings (P/E) ratio is 24.3. Activision’s? 25.8. With minimal difference in terms of forward multiple, Activision appears to be the better play.
Ahead of Earnings, It’s Time to Sell EA Stock
I don’t doubt the video game industry is doing well in the current market environment. But that doesn’t mean Electronic Arts is the best way to play this trend. Rivals like Activision may be a better way to get exposure to this sudden surge in video game sales.
While the company could beat on earnings on May 5, don’t expect a lot more upside in EA stock. If you bought in at lower prices, consider now the time to cash out. Otherwise, wait for a lower valuation before putting in a buy order.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
