Shares of video-game powerhouse Electronic Arts (EA) and the broader basket of video-game stocks have been quite turbulent in recent years. There are reasons to get excited about EA and its sluggish peers again with the recent consolidation activity in the space.
Although it’s not a great idea to speculate on when or who will be interested in a takeover, I’d argue that the scarcity premium in a stock like EA could increase with time, as big tech gobbles up the limited number of publicly traded gaming stocks.
Gaming is a top draw of the metaverse. Although experiences and even work could become a significant part of the metaverse in the future, I’d argue that such a reality where people are plugged in for entertainment beyond just gaming is at least 10 years out.
Arguably, the “metaverse” is already here with the many flexible, open-world games out there. The “metaverse” that Meta Platforms (FB) seems to be going after looks to be an immersive virtual one that may be a tad ahead of its time.
Metaverse
Dismiss the metaverse if you want, but I think it holds real opportunity, especially for gamers.
That said, I think firms going “all-in” with metaverse ambitions are ahead of their time and could be punished for overinvestment in an effort that could take a decade or more to really pay off.
Though Meta has the deep pockets to make noise in the metaverse, I’d argue that the safest way to play the trend is with the gaming stocks, especially as they tread water. They’re likely to be acquired over the next five years, but it’s hard to tell if the acquisition price will be higher or lower than current prices, especially if this market sell-off becomes a bear market.
For now, I am bullish on EA stock. The stock trades at 5.7 times sales, which is quite reasonable for a large-cap gaming stock that could be ready to flex its muscles as virtual reality titles grow increasingly popular.
If the metaverse isn’t ready for another decade or more, EA will still do fine, as the firm is well-equipped to continue raking in considerable cash flows from its solid lineup of annual and non-annual releases.
A Big Prize for a Big Tech Firm?
The acquisition of Activision Blizzard (ATVI) by Microsoft (MSFT) has been one of the biggest stories of late. I think Microsoft could be walking away with a steal in a cash deal worth almost $69 billion. With so many firms itching to get into the gaming space, I think EA is the next best dance partner.
EA is behind many top sports titles that have annual releases. Such annual titles have sports fanatics engaged, and cash flows from such titles are relatively solid and predictable. It’s not just sports titles, though; EA is taking its big-budget blockbuster titles seriously.
Still, unlike Activision Blizzard, I view EA as a company whose titles could become “stale” with time. Do gamers have enough to justify scooping up the latest sports game? Or will last year’s version suffice?
Wall Street’s Take
According to TipRanks’ analyst rating consensus, EA stock comes in as a Strong Buy. Out of 17 analyst ratings, there are 14 Buy recommendations and three Hold recommendations.
The average Electronic Arts price target is $162.06, implying an upside of 25.9%. Analyst price targets range from a low of $127 per share to a high of $180 per share.
Bottom Line on EA Stock
EA stock is a prime takeover target in my books, with the video-gaming industry likely to continue consolidating over the next few years. Although EA could bolster any firm’s services offering, it’s hard to tell whether a takeover offer will come before or after the next pullback.
Despite mixed success for Battlefield 2042, I remain a fan of EA and its deep content library. Sports video games are here to stay, and with major graphical upgrades coming, I think diehard fans will not be able to resist buying the latest and greatest sports title.
In any case, I’d look for EA Play to onboard many casual gamers that are unlikely to spend considerable amounts on annual titles. It’s this casual gaming audience that could propel EA and the industry to the next level.
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