Electronic Arts Stock Down 6% in September – Time to Buy EA Stock?

The price of Electronic Arts stocks has gone down 6% so far in September as a result of a pronounced downtick that took place yesterday after the company announced that it will delay the release of its long-awaited Battlefield 2042 title.

EA cited pandemic-related disruptions as the main reason for this postponement as their developing team has not been able to go back to the studios as fast as expected amid the current conditions – referring to the fast spread of the Delta variant. Meanwhile, Electronic Arts set forth the new date for the release for 19 November this year.

Market participants reacted negatively to this development as Battlefield is one of EA’s most important games in terms of revenue. However, the company stated that this delay should not affect its net bookings guidance for the 2022 fiscal year.

Could this sharp single-day drop result in the beginning of a downtrend for EA stock or is this just a short-lived fluke? In the following article, I’ll attempt to provide more clarity on what could come next by analyzing the latest price action and the company’s fundamentals.

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Electronic Arts Stock – Technical Analysis

The price of Electronic Arts Stock had been on an uptrend since the pandemic crash of February-March 2020 as confinements were expected to lift the company’s top-line results amid stronger demand for its flagship titles.

However, the company failed to dazzle last year as sales only advanced 1.7% compared to the previous period. As a result, the stock failed to break above its all-time highs of $146 per share this year and retreated sharply only a few weeks after tagging that particular threshold.

Thus far, the stock has traded range-bound most of the year but has now broken the long-dated lower trend line that emerged after the pandemic crash and that could be a signal that a downtrend may be about to start for Electronic Arts stock.

Trading volumes reinforce this view as more than 6 million shares exchanged hands during the day – a number that was 3 times higher than the 10-day average.

Moreover, the MACD has just crossed below the signal line and this turn is being accompanied by the first negative momentum reading in weeks.

Moving forward, the outlook for Electronic Arts is bearish and the $135 level remains a key horizontal support to watch as a break below this marker may indicate that the stock is poised to experience further downside.

Electronic Arts Stock – Fundamental Analysis

Sales of Electronic Arts have been relatively stalled in the past five years as they have grown at a compounded annual growth rate (CAGR) of 4%. This top-line growth is particularly disappointing for a firm that participates in one of the hottest industries at the moment.

During that same period, data from Statista and NewZoo show that the video game industry as a whole has expanded at a rate of around 10.5% per year, meaning that EA’s performance is lagging that of its peers.

Meanwhile, during that same period, apart from an abnormal 2019 fiscal year when the company reported $3 billion in net profits amid a one-time tax windfall, its bottom-line results have stood at around $800 million and $1 billion.

On the positive side, EA has a relatively small long-term debt and its cash flow generation capacity is solid as the firm has been producing over $1.5 billion in free cash flows in the past few years.

For this upcoming 2022 fiscal year, the management team is expecting a pronounced 21% jump in its top-line results that would result in a significant acceleration compared to EA’s historical performance.

However, its net income is expected to shrink even further to $390 million, down from the $837 million figure the firm reported this past year.

This volatility in the company’s bottom-line results makes it more difficult to predict how EA’s performance will evolve in the following years and that is perhaps the reason why the stock is failing to climb to fresh all-time highs.

Moreover, since some of this sales growth is expected to come from recently acquired subsidiaries and not from an expansion in the company’s core business, market participants might be skeptical about how the performance of EA could be affected moving forward as a result of acquisition-related expenditures.

At its current price of $137 per share, EA stock is being valued at 20 times its forecasted adjusted earnings per share for the next twelve months. Meanwhile, the company is trading at 5.7 times its forecasted sales for this 2022 fiscal year.

This valuation seems conservative as EA has displayed for years strong and predictable top-line margins. However, the company’s struggles to take advantage of the positive momentum that the video game industry is experiencing at the moment might continue to weigh on the performance of its stock price unless the management takes some decisive steps to change things around.

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