Will EA’s share price bounce after earnings?

Electronic Arts’ [EA] share price rocketed over the last 12 months as more people turned to video games for entertainment during the coronavirus pandemic.

EA’s share price climbed 33.8% last year, from $107.23 on 31 December 2019 to $143.42 by the end of 2020, boosted by the successful launches of games such as FIFA 21 and Medal of Honor.

These games aren’t just being played at home with friends and family, but against other users online in a tournament setting under its competitive gaming division.

In its third-quarter results, EA’s share price benefitted from the news that net bookings, the net amount of products sold digitally or physically in stores for the trailing twelve months, was up 8% year-on-year at $5.95bn. For the three months ended 31 December, net bookings rose to $2.4bn, up from $2bn in the same period last year. Total net revenues for the quarter rose to $1.67bn from $1.59bn.

  

However, EA’s share price couldn’t overcome the firm’s disappointing guidance stating that it expected an earnings loss of $0.07 per share and net bookings of $1.37bn in the fourth quarter.

The guidance added to concerns of a possible softening in video game demand as lockdowns end and a potential economic downturn puts a squeeze on disposable income. According to NPD data, US video game sales in January, February and March increased by 42%, 35% and 18%, respectively.

EA’s share price dropped to a low of $127.21 on 8 March before recovering once again to $140.65 at close on 10 May.

As the company prepares to release its fourth-quarter results on 11 May, will EA’s share price continue to climb or will it take further hits?

 

New content key to growth

According to Trefis, EA’s fourth-quarter revenue is expected to come in at circa $1.3bn for the quarter, below the consensus estimate of $1.4bn. This, the research firm considered, is largely because EA had fewer releases this year compared to 2020.

It expects EA to post earnings per share of $1.02, although the consensus mark for earnings, according to Zacks Equity Research, is $1.04 per share.

“EA’s focus on adding updates to its games that feature exciting content makes the platform attractive to users,” Zacks stated. “Moreover, coronavirus-led social distancing norms are expected to have been a major growth driver in increasing the number of active users.”

“EA’s focus on adding updates to its games that feature exciting content makes the platform attractive to users. Moreover, coronavirus-led social distancing norms are expected to have been a major growth driver in increasing the number of active users” - Zacks Equity Research

 

The performance of rival Activision Blizzard [ATVI] is positive for EA’s share price prospects. Activision recently revealed first-quarter net bookings of $2.07bn, up from $1.52bn in the same period in 2020.

The long-term video game industry projections also look strong. According to Netscribes’ gaming market research, the digital games market is expected to grow at an annual rate of 18.9% between 2021 and 2026.

EA’s share price will benefit from this growth if existing franchises, such as Madden NFL, remain popular, and it keeps producing new “must-have” content.

In an effort to continue releasing popular content, EA has been on the acquisition trail, buying both Glu Mobile for $2.1bn and UK-based racing game developer Codemasters for $1.2bn in February.

“As new players pick up gaming, Electronic Arts has the resources to continue investing in new content to grow revenue and generate market-beating returns, as it has over the last few decades,” John Ballard wrote in TheMotley Fool.

“More immersive gaming experiences and easier access to games, enabled by cloud gaming platforms and mobile devices, are powerful forces that should push EA's stock price to new highs over the long term.”

“More immersive gaming experiences and easier access to games, enabled by cloud gaming platforms and mobile devices, are powerful forces that should push EA's stock price to new highs over the long term” - John Ballard

 

A good buying opportunity

Trefis was also optimistic about EA’s share price, believing that most new players acquired during the pandemic will remain glued to their consoles.

“With Glu, Electronic Arts has now access to popular female-centric games, including Kim Kardashian: Hollywood. The Glu acquisition will strengthen the company’s mobile business, which currently accounts for just 13% of the company’s total sales,” the research firm stated.

“Looking forward, Electronic Arts will likely see an increase in revenue with the recent acquisitions. We believe EA stock is a good buying opportunity at the current level of $131.”

“Looking forward, Electronic Arts will likely see an increase in revenue with the recent acquisitions. We believe EA stock is a good buying opportunity at the current level of $131” - statement from Trefis

 

Wedbush analysts have a buy rating for EA’s share price and a price target of $175, according to Investing.com. Meanwhile, MarketBeat data shows that Credit Suisse had an outperform rating and a price target of $160.

EA Sports is also a fixture in several video game themed ETFs. One such ETF, the VanEck Vectors Video Gaming and eSports ETF [ESPO] was down 4.21% in the year to date (through 10 May).