A Big Catalyst for EA Stock
When Electronic Arts Inc. (NASDAQ:EA) unveiled its highly anticipated “Madden NFL 17” football video game on August 23, enthusiasm helped buoy EA stock to an all-time high. Two weeks earlier, the company scored a major partnership coup by signing a three-year deal to become the official video game partner of Manchester United—an impressive union that focused more attention on Electronic Art’s highly anticipated “FIFA 17” video game. And looking ahead, 2017 will see the release of the next installment of the Star Wars film franchise, and since Electronic Arts holds the video rights to that lucrative offering, it is too easy to imagine more activity in that area.
While no one is questioning Electronic Arts’ ability to team up with iconic sports and entertainment entities—nor is anyone deriding the company’s talent for creating its own proprietary titles—the question remains whether Electronic Arts stock is a good bet. Admittedly, digital creativity and fiscal performance are not synonymous, and more than a few cutting-edge tech companies are notorious for their underperforming stocks. But EA is showing an increasingly muscular vigor that is lacking in many tech stocks, and it would appear that the near future holds great potential for EA stock.
A Serving of Fun and Surprise From Electronic Arts
From a corporate perspective, this has been an uncommonly successful time for the Electronic Arts brand. In addition to the aforementioned “Madden NFL 17” release and Manchester United partnership, Electronic Arts Inc. turned up the buzz machine with a well publicized beta test for its “Titanfall 2” multiplayer game, which is scheduled for an October 28 debut on the “PS4,” “Xbox One” and personal computer (PC) platforms. (Source: “A comprehensive test of the servers and the backend was conducted on Titanfall 2 multiplayer,” The Country Caller, August 24, 2016)
Electronic Arts Inc. continues to see strong loyalty among gamers for its current offerings. During the first quarter of its fiscal year 2017 that concluded in June, the company recorded more than 6.6 million players for its “Star Wars Battlefront” game and more than 11.5 million players on its “Battlefield” franchise, the last entry of which debuted last November and has already become one of the top-downloaded “iOS” games in more than 130 countries. (Source: “Digital Transformation Drives Electronic Arts’s Revenues in Fiscal 1Q17,” Market Realist, August 17, 2016)
As for the Electronic Arts stock, its first-quarter 2017 fiscal year earnings generated a nice surprise: it earned seven cents a share, excluding items on sales of $682 million during the quarter, which is a significant difference from the anticipated two cents a share on sales of $651 million that was predicted in a Thomson Reuters poll of analysts. On a year-over-year basis, Electronic Arts’ earnings per share fell 53% and sales slipped 2%. But, then again, the company did not introduce any new titles during this quarter. (Source: “Electronic Arts Stock Gets Price Target Hikes On Q1 Earnings,” Investor’s Business Daily, August 3, 2016)
However, the fiscal first quarter will be the final time that Electronic Arts incorporates revenue, gross margin and per-share earnings on an adjusted basis. This switch follows pressure from the U.S. Securities and Exchange Commission on earnings reports that rely on metrics that are not in sync with generally accepted accounting principles (GAAP). (Source: “Electronic Arts Sees Smaller-Than-Expected Decline in Profit, Revenue,” The Wall Street Journal, August 2, 2016)
The viability of Electronic Arts stock is, curiously, bringing about a bit of polarization among investment experts. Following the release of “Madden NFL 17, TheStreet rated EA stock as a “buy” with a ratings score of “A,” but Piper Jaffray offered an “overweight” rating and went so far as to predict that the game would generate flat year-over-year sales in 2017. (Source: “Electronic Arts (EA) Stock Up on ‘Madden NFL 17’ Launch,” TheStreet.com, August 24, 2016)
Trade-Ideas LLC went even further in its pessimism, branding EA as “water-logged and getting wetter.” (Source: “Trade-Ideas: Electronic Arts (EA) Is Today’s “Water-Logged And Getting Wetter” Stock,” TheStreet.com, August 3, 2016)
And, yet, 17 out of 21 analysts at brokerage firms that assign “buy” ratings have a “buy” or “better” rating for EA stock, while Wedbush analyst Michael Pachter gave EA an “outperform” rating and predicted “significant growth for the foreseeable future, driven by impressive franchises, digital momentum and cost discipline.” (Source: Investor’s Business Daily, op cit.)
The Takeaway Regarding EA Stock
For a company that seems to have all the right moves, it is strange to see ratings of “overweight” and “water-logged” connected to EA stock. Of course, you can’t please everyone, and even the self-proclaimed experts are far from infallible, as EA proved with its recent earnings report.
With a strong lineup of current and soon-to-be-released titles plus a global army of fans that are showing no signs of rejecting its video games, Electronic Arts Inc. certainly gives the impression of being in a great place. Turning down EA stock at this time would be a strange strategy, as Electronic Arts is poised to continue to be a leading player in its tech sector for the coming year.