EA Stock: Is It Time to Dump Electronic Arts Inc?

Electronic Arts StockIs It Time to Bail on EA Stock? Definitely Not!

Video game developer, distributor, and publisher Electronic Arts Inc (NASDAQ:EA) took a beating on Monday after retailer GameStop Corp. (NYSE:GME) issued a negative signal on EA’s biggest game release this year: Star Wars, Battlefront. After GameStop reported initial sales of the game to be lower than it had expected, EA stock cratered close to five percent in Monday’s trading.

Is this reaction reasonable? Definitely not! Here’s why.

Mr. Market Forgot to Factor in Digital Sales

EA stock has been riding the market on hopes of higher-than-anticipated sales for its top release this year. EA is expecting to sell more than 13 million copies of its latest title in the Star Wars franchise, but GameStop’s negative outlook on Monday caused a major dent in the developer’s share price.

The market is forgetting that GameStop is essentially a retailer of physical copies of video games. Therefore, GameStop’s outlook would naturally be focused on physical sales. The bigger chunk of EA’s revenue, however, comes from digital sales. Last holiday season, for instance, we saw digital sales of video games outpace physical sales for all publishers. (Source: “Digital games set to outsell retail during 2014 holiday season,” Super Data, January 8, 2015.)

I, for one, find downloading my games to be far more convenient than buying physical copies and obviously, according to the data, I’m not the only one. Digital sales have been picking up pace in the last few years, with physical sales slowly losing ground, as gaming consoles continue to expand their local and cloud storages.

For the year 2014, digital sales made up 52% of total video game sales in the U.S., while physical sales stood at 48%. (Source: “Breakdown of U.S. computer and video game sales from 2009 to 2014, by delivery format,” Statista, last accessed November 24, 2015.) This obviously spells trouble for retailers like GameStop, but not necessarily for the video game publishers, like EA.

Also, Mr. Market is missing GameStop’s positive take on the game. The video game retailer is still expecting the Battlefront title to be its biggest seller this season, expecting sales to pick up as soon as The Walt Disney Company releases the next Star Wars movie by mid-December.

Bear in mind that a push in sales is further expected to come, in part, through consoles. Both Microsoft Corporation and Sony Corp. have priced their respective consoles, the “Xbox One” and “PlayStation4,” lower for Black Friday sales at an unbelievable $299.00 each. This is a very attractive price cut for U.S. consumers and is expected to drive higher sales volume. Consequently, we can expect higher sales of game titles to follow.

I rest my case with a reminder of EA’s latest quarterly performance, wherein the company beat on both earnings and revenue estimates, guided higher for the next quarter, and posted some stellar performance figures.

The Bottom Line on EA Stock

EA is a top-of-the-line, high-end video games publisher that holds a strong portfolio of popular franchises. In addition to its famous first-person and third-person shooter games, including the Battlefield series, Mass Effect series, and now Star Wars: Battlefront, the company also boasts a strong lineup of sports titles, including its Madden NFL, FIFA, and NHL series, all of which have been promising revenue-drivers for the company.

EA’s stock has been a top performer on the market, with its share price up more than 47% in the year-to-date run, as compared to the S&P 500’s run of a little over one percent. I’m predicting Battlefront to be a strong driver of revenue for the company and with the new installments of Battlefield and Mass Effect in the pipeline, I foresee the stock soon soaring past its all-time highs.

The bottom line: don’t disregard EA stock just yet.

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