Top game developer and publisher Electronic Arts, Inc. (NASDAQ:EA) is flying high this year, making new all-time highs. EA stock has reached a point at which stockholders are nervous that the stock may rebound any day now. I believe this fear is irrational. Here are three reasons why I’m bullish on EA stock.
1. Strong Game Lineup
EA has the biggest library of games with some of the most popular names in its portfolio, including Battlefield 4, Battlefield Hardline, and Mass Effect as its all-time top pullers of revenue. In addition, the EA Sports segment has been particularly successful, with Madden NFL 16, NHL 16, and FIFA 16 among the top sellers this year. The company’s live service has been driving strong revenue from loyal gamers as well.
However, all eyes are now set on Star Wars: Battlefront, which is releasing next week, marking the biggest and most hyped release of the year. Battlefront had a record gamer turnout for its beta version and is already anticipated to be a massive hit.
2. Significant Institutional Holdings
The institutional ownership of EA stock stands at more than 104%! Huge institutional holdings can sometimes have negative effects on the stock because of their influential stake. However, the paradoxical number in this case may be pointing to dual ownership for some of the float.
Seemingly, some institutions may have been selling EA stock on margins and the shorted stock has taken the ownership to beyond 100%. This could cause a major spike in EA stock on a short squeeze, as the shorts hit the market to cover their positions. Despite the fact that only a little over five percent of the stock float is currently short, which would otherwise have not caused a significant squeeze, the unique situation at hand may lend a boost to EA stock.
3. Strong Balance Sheet
The last and most important reason why I’m rooting for EA stock is the company’s very tempting financials. EA’s balance sheet is relatively cleaner than its peer Activision Blizzard, Inc., with lower debt and a strong cash position. The company has been spending almost double that of its competitor on research and development, yet it boasts higher returns on both assets and equity.
Electronic Arts has a history of beating earnings quarter after quarter for the last year and EA management is optimistic about the company’s future, having guided higher than analysts had expected for full-year results.
The Bottom Line on EA Stock
Electronic Arts remains a key player in the gaming industry, which is expected to grow by 30% in the coming three years. (Source: “U.S. games industry forecast to grow 30 percent to $19.6B by 2019,” VentureBeat, June 2, 2015.) Analysts at MKM Partners, Piper Jaffray and now Oppenheimer have recently upgraded EA stock and the average analyst price target is set at more than $80.00. In particular, Battlefront is expected to be a huge winner for the company this quarter.
The bottom line: EA stock seems like a strong play for the coming days.