Electronic Arts (NASDAQ:EA) has been on a heck of a run lately, rallying 65% from the March lows to new highs. While a look at the chart has investors thinking “too far, too fast,” the themes behind the move in EA stock remain in place.
That is, the novel coronavirus continues to drive the stay-at-home theme. While sports, vacations and hopes for a return to normalcy continue to pick up steam, we are still faced with a tough reality.
Coronavirus cases continue to spike and while the public is venturing out more and more, risks are present. While it’s easy to look at all the people out and about, we should recognize that plenty of people still remain cautious.
Video Games and the Coronavirus
There’s no arguing that Covid-19 has caused a dramatic rise in video game sales.
Sales exploded higher in March, which made sense as lockdown orders began to roll in. However, that trend continued into April, with the industry logging record monthly sales. May also saw continued momentum, with video game sales up 52% year-over-year for the same month a year ago.
The strength is across the board, too. Consoles, games and hardware are all feeling the love. We have not yet received the sales data for June, although it should be coming along soon, but it will likely be solid. With that said, as America continues to reopen and as the weather improves in many parts of the country, we may see sales start to cool off a bit.
Even if the momentum cools a bit — which it should eventually — I still think the theme remains alive and well. The last three months are evidence of just that.
Sizing Up Electronic Arts
With video game sales seeing a boon, one would think the projections would be better for Electronic Arts.
Analysts expect revenue growth of 7.1% this fiscal year, which EA has just started (and has yet to report Q1 results for). In fiscal 2022 (next year), estimates call for 8% revenue growth.
These estimates follow fiscal 2020, where revenue grew almost 12% year-over-year. That’s as it captured 14.7% revenue growth in its final quarter, ending March 31. So April and May sales have spilled into the current year, which would help explain some of the continued momentum in the share price.
On that note, analysts expect 43% revenue growth in the current quarter, before tapering off to just 6.5% growth next quarter. If management can provide guidance that says future consensus estimates are too conservative, then EA stock has room to the upside.
Currently, shares trade at roughly 28 times this year’s earnings expectations. That’s not cheap necessarily, but it’s not egregious given the growth the company is experiencing at the moment.
Bottom Line on EA Stock
There are a lot of considerations to make with EA stock. On the one hand, the expected growth in Electronic Arts is not overwhelmingly impressive on a full-year basis. On the other hand, while its stock performance has been good, EA stock has lagged many names in the tech space. That could give it upside potential.
For instance, Apple (NASDAQ:AAPL) and most of FAANG have all outperformed Electronic Arts from the lows. Although, we must concede that EA’s run has been about in-line with its peers like Take-Two Interactive (NASDAQ:TTWO) and Activision Blizzard (NASDAQ:ATVI).
A look at the chart shows the strong price action. EA stock was grinding up along uptrend resistance (blue line) before eventually breaking out over this mark and then finding it as support.
The rally has taken shares to new highs and has the stock above all of its major moving averages. Just above current levels is the two-times range extension up near $142.50. Above that technically puts the 261.8% extension in play near $260.
On a dip, I want to see the 20-day moving average hold as support, at $132.50, as well as the 161.8% extension at $131.71.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.