Electronic Arts: Reasonably Priced, Catalysts to Come

Electronic Arts (EA) appears poised to continue seeing growth despite the easing of lockdown restrictions.

The company develops and publishes video games, and is known for its sports and Battlefield franchises. The company appears reasonably priced at approximately 19.3 times next year’s earnings.

However, we remain neutral on the stock in the short-term, as we believe its stock price uptrend is breaking down. (See Electronic Arts stock charts on TipRanks)

Growth Catalysts

Electronic Arts (EA) operates in the gaming industry, which was valued at $173.7 billion in 2020. The industry is expected to grow at a CAGR of 9.64% between 2021 and 2026.

A potential industry tailwind is the growth of the esports market, which is expected to grow at a CAGR of 24.4% between 2020 and 2027. In addition, the increasing prevalence of high-speed Internet in emerging economies has made online gaming more practical.

A company-specific near-term growth catalyst for Electronic Arts will be the release of Battlefield 2042. Battlefield is an important franchise for the company. Battlefield 5, the series’ previous release, was viewed as a flop.

However, Battlefield 2042 appears to be generating a positive response from the gaming community based on the like-to-dislike ratios of its trailers on YouTube.

The designers of the game appear so determined to make this game a hit, that they have decided not to include a campaign mode. Instead, they dedicated all their resources towards making the online gameplay as good as possible.

Risks

Like anything, Electronic Arts comes with risks. The most obvious risk is the potential for Battlefield 2042 to be a flop. However, it’s worth mentioning that Battlefield 5 has been making a comeback in the past several months.

After flopping initially, updates have been made over time that seem to have revitalized the game. Thus, the developers should have a good sense of what players want for Battlefield 2042.

However, the release date of Battlefield 2042 has been pushed out to November. This means that gamers will have a chance to buy the new Call of Duty game first, which is owned by Activision Blizzard (ATVI). This may have an impact on sales for Electronic Arts. In addition, Battlefield isn’t the only game the company has. Therefore, there’s the risk that any of its new releases may flop.

Wall Street’s Take

Turning to Wall Street, Electronic Arts has a Strong Buy consensus rating, based on 17 Buys, and four Holds assigned in the past three months. The average Electronic Arts price target of $171.82 implies 35.2% upside potential.

Final Thoughts

Electronic Arts is a company with many great franchises. At this moment, it appears that the new Battlefield, which is set to launch in November, should be a hit.

However, the uptrend for the stock may be starting to reverse or slow down. Thus, we would wait to see if we could possibly get a better price before entering a position.

Disclosure: At the time of publication, Stock Bros Research did not have a position in any of the securities mentioned in this article.

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