Shares of popular video-game developer Electronic Arts (EA) haven’t gone anywhere over the past few years. Amid the broader video game market consolidation, EA remains a very attractive dance partner for a tech or media giant looking to break into the industry. Indeed, EA has been subject to acquisition rumors of late. Though gaming faces some headwinds going into a recession, EA remains one of the better publicly-traded deals for investors eager to get into gaming while it’s down and out.
Despite the baggage and sluggish sales on select titles, including the latest iteration of the Battlefield franchise, the management team sees itself on sound footing, even without a suitor. I am bullish on EA stock.
The Video Game Industry Landscape Has Changed
There are no easy issues for the gaming market with a recession on the way. The bigger concern, though, lies with how the market has changed in recent years. The landscape has changed in a big way, with disruptive forces like cloud gaming, think Microsoft’s (MSFT) Xbox Cloud Gaming, and video-game subscriptions (like Microsoft’s Game Pass).
The Netflix (NFLX) of games has been around for quite a few years. It’s gotten a lot better and could curtail spending on individual titles, just as Netflix weighed heavily on the sale of DVDs back in its glory days. Though many may point the finger at the looming recession, I view the rise of the Xbox Game Pass as a reason why individual game sales have underperformed.
Why buy the latest Battlefield when it’ll find its way to Xbox Game Pass at some point down the road?
It’s this type of thinking that may make it difficult for video game developers to really thrive in an era of Microsoft’s Game Pass. Ultimately, I think EA will be acquired by a technology company. That said, many firms may be waiting for lower prices before thinking about getting in due to the profound macro and industry headwinds that may continue to weigh.
Nonetheless, I am bullish. As market consolidation continues, pure-play gaming stocks will be fewer and farther between as big tech looks to change the business forever.
If You Can’t Beat Them, Join Them
EA hasn’t been asleep at the wheel while gaming subscriptions took off. The firm’s EA Play is a nice addition to Xbox Game Pass. In any case, Microsoft seems to be getting more value from the partnership. EA prides itself on sports content, which smoothens year-over-year earnings.
However, it’s clear that EA needs to go beyond sports if it’s to truly thrive. In the realm of first-person shooters, Battlefield faces stiff competition from the likes of Call of Duty and even Microsoft’s Halo. In fact, Halo Infinite, the latest iteration in the series, was to blame for weak sales in Battlefield 2042.
Further, many gamers may view Battlefield as “more of the same.” Indeed, EA needs to return to the basics and open up its wallets to deliver cutting-edge content. Unfortunately, I do think EA would be in much better hands under a tech behemoth with deep pockets. That way, EA wouldn’t have to worry too much about impressing shareholders on a quarter-to-quarter basis.
Though EA sees itself as fine without being taken over, I think the stock price speaks for itself. Shares of EA have been lagging the market in recent years. The stock is where it was back in early 2018.
Fierce competition and changing consumer habits as a result of subscription-based gaming services, I believe, are to blame.
How Will EA Fare Once a Recession Arrives?
Recent trends in gaming have been discouraging. At this juncture, game subscriptions are akin to video streamers many years ago, while game developers are akin to the disrupted media companies. Regardless, I expect EA will be fine in a recession, given its strong content and brand library. Further, video games are a relatively affordable form of entertainment.
Looking ahead, I’d look for Apex Legends Mobile to help power EA to another quarterly beat. Management was upbeat on Apex and its sporting titles. As supply constraints ease and gamers finally get their hands on the latest generation of consoles (the Xbox Series X and S or PlayStation 5), I think the next upgrade cycle (2023 titles) could be the biggest in a long time.
Recession or not, EA’s road ahead looks less bumpy than the road behind it.
Is EA Stock a Buy or Sell?
Turning to Wall Street, EA stock comes in as a Moderate Buy. Out of 14 analyst ratings, there are nine Buys and five Hold recommendations.
The average EA price target is $151.07, implying upside potential of 17.9%. Analyst price targets range from a low of $130.00 per share to a high of $170.00 per share.
Conclusion: EA is Still One of the Best Deals in Gaming
EA stock has been through quite a turbulent few years. With a recent quarterly earnings beat (EPS of $0.41 versus $0.33 consensus) in the books, I’d look for EA to pole-vault past relatively low earnings bars up ahead.
Though a recession and the rise of Netflix-like services could weigh on game sales, truly next-generation sports titles and other intriguing offerings in the realm of mobile could help EA break out of its multi-year funk.
At the time of writing, most Wall Street analysts are upbeat. Indeed, many EA investors may wish to see an acquirer step up, but I don’t think one is needed for the stock to trend higher again; there’s too much negativity baked in. Further, EA seems more resilient than many may give it credit for.
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