Shares of video-game development giant Electronic Arts (EA) have been stuck in a funk for quite a while. With so much consolidation activity within the video-gaming market over this past year, there is hope that a firm may be ripe for a takeover. Until then, the stock could continue to be uneventful, as the pandemic tailwind facing at-home entertainment continues to fade further.
Additionally, EA may not have the best strategy to keep audiences engaged when it comes to its frequently-released titles.
Undoubtedly, the company has many pieces of intriguing IP in the gaming scene, with its annual sports titles and Battlefield franchise. These titles tend to be hardest to refresh year after year. Indeed, it seems like such annual sports titles are best packaged into an annual subscription like “EA Play.”
Despite similarities between last year’s NHL title and this year’s, many sports fanatics tend to be more than willing to pay up the full sticker price to get the latest rosters and slightly improved graphics.
Although next-generation consoles and engines seem to pave the way for the biggest jump between annual releases, I do think that over the long haul that it will be harder to grow interest in such titles and that their fate lies within a subscription-based service like EA Play or EA Play Pro.
The immediate inclusion of the latest sports title on such a platform could weigh on overall sales. In any case, I think EA needs to play the game of “acquire or be acquired” as the video-gaming industry becomes more competitive.
For now, I am neutral on EA stock. While frequently released titles aren’t subject to massive year-over-year growth, they are sticky titles that could propel the firm’s EA Play subscription to success.
What Could Reignite the Stock?
In an era that could see the continued “Netflix-ization” of video games, EA looks to be on the right track with EA Play. To get its stock moving much higher, it needs a bigger catalyst beyond just refreshing older titles and IP, which may prove more challenging over time.
Following the mixed success of Battlefield 2042 (the latest installment in the Battlefield franchise), the company may need something brand new to re-earn the hearts of gamers. The last thing the company wants is for gamers or critics to assume the next installment in a series is just more of the same.
There are many levers EA could consider pulling at this juncture to revamp growth. Whether that’s in the form of an ambitious, albeit riskier new IP, another strategic shift, or further acquisitions of some of the smaller, tuck-in game studios out there, there’s no shortage of options.
Valuation
At writing, shares of EA trade at around 5.7 times sales and 56.6 times trailing earnings.
After recent gaming consolidation activity in the gaming space, EA may find itself deserving of more of a scarcity premium at some point. Still, I find the current valuation to be a tad excessive, given the lack of meaningful catalysts. With a potential recession on the horizon, EA stock may find it even hard to break the $150 per-share mark without an unforeseen blockbuster.
For Q3 2022, the company posted 7% in sales growth alongside 5% in non-GAAP EPS. Despite somewhat decent ratings on its flagship Battlefield 2042 game, the company noted it fell short of expectations.
With the Fiscal Year 2022 bar now slightly lowered, most of the selling pressure may already lie in the rear-view mirror. As big tech looks to bolster its subscription revenues with the acquisition of gaming firms, EA may be in a spot to get a bid at some point over the near future. Still, I wouldn’t be a buyer of EA stock over takeover speculation.
The third-quarter disappointment was underwhelming, to say the least. It remains to be seen how EA can make the most of their recent acquisitions of smaller gaming companies like Codemasters and Glu Mobile.
Wall Street’s Take
According to TipRanks’ 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 EA price target is $163, implying 30.8% upside. Analyst price targets range from a low of $127 per share to a high of $180 per share.
Bottom Line on EA Stock
Amid industry consolidation, EA looks like one of the last big elephants for mega-cap firms itching to get into gaming to scoop up. I think it’s just a matter of time before the next wave of consolidation hits the gaming industry.
For now, expect EA to continue scooping up what remains of the fragmented video-gaming scene as it looks to bolster the value proposition of its EA Play service.
Download the TipRanks mobile app now
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Read full Disclaimer & Disclosure
