A bargain in video games

Shares of the famous video game developer Electronic Arts (EA) haven’t gone anywhere in 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 the subject of acquisition rumors lately. Although the game faces headwinds ahead of a recession, EA remains one of the best publicly traded offerings for investors looking to get into the game while it’s down.

Despite the baggage and slow sales of some titles, including the latest iteration of the Battlefield franchise, the management team sees itself on solid footing, even without a suitor. I’m bullish on EA stock.

The landscape of the video game industry has changed

There are no easy problems for the gaming market with an impending recession. The biggest concern, however, is how the market has changed in recent years. The landscape has changed a lot, with disruptive forces like cloud gaming, Microsoft believes (MSFT) Xbox Cloud Gaming and video game subscriptions (like Microsoft’s Game Pass).

Netflix (NFLX) of games has been around for a few years. This has improved a lot and could reduce spending on individual titles, much like Netflix weighed heavily on DVD sales in its glory days. While many may point to the impending recession, I see the rise of Xbox Game Pass as a reason why individual game sales have underperformed.

Why buy the latest Battlefield when it will find its way to Xbox Game Pass at some point?

It’s this type of thinking that can make it difficult for video game developers to truly thrive in the era of Microsoft’s Game Pass. Ultimately, I think EA will be taken over by a technology company. That said, many companies may be waiting for lower prices before they think about entering due to the deep macroeconomic and industrial headwinds that may continue to weigh.

Nevertheless, I am optimistic. As market consolidation continues, there will be fewer and fewer pure gaming stocks as big tech seeks to change the business forever.

If you can’t beat them, join them

EA didn’t fall asleep at the wheel while game subscriptions took off. The firm’s EA Play is a nice addition to Xbox Game Pass. In any case, Microsoft seems to derive more value from the partnership. EA prides itself on sports content, which smooths revenue year over year.

However, it’s clear that EA needs to go beyond sports if it really wants to thrive. In the realm of first-person shooters, Battlefield faces fierce competition from Call of Duty and even Microsoft’s Halo. In fact, Halo Infinite, the latest iteration of the series, was responsible for the poor sales in Battlefield 2042.

Additionally, many gamers may view Battlefield as “more or less the same.” Indeed, EA needs to go back to basics and open its wallets to deliver cutting-edge content. Unfortunately, I think EA would be in much better hands under a deep-pocketed tech juggernaut. That way, EA wouldn’t have to worry too much about impressing shareholders from quarter to quarter.

Although EA considers itself good without being taken over, I think the stock price speaks for itself. EA shares have lagged the market in recent years. The stock is where it was at the start of 2018.

I believe the fierce competition and changing consumer habits as a result of subscription gaming services are to blame.

How will EA fare once a recession hits?

Recent trends in gaming have been discouraging. At this point, game subscriptions are akin to video streamers of many years ago, while game developers are akin to disrupted media companies. Either way, I think EA will do well in a recession given their strong content and brand library. Additionally, video games are a relatively affordable form of entertainment.

Looking ahead, I’d look to Apex Legends Mobile to help propel EA into another quarterly pace. Management was bullish on Apex and its sports 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 expect the next upgrade cycle (2023 titles) might be the biggest in a long time.

Recession or not, the road ahead of EA looks less bumpy than the road behind it.

Is EA Stock a Buy or Sell?

As far as Wall Street is concerned, EA stocks are in moderate buy form. Out of 14 analyst ratings, there are nine buy recommendations and five hold recommendations.

The average EA price target is $151.07, implying an 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 gaming deals

EA stock has had a pretty turbulent few years. With a recent quarterly earnings beat (EPS of $0.41 vs consensus of $0.33) on the books, I’d be looking for EA to pole vault past the relatively low earnings bars.

While a recession and the rise of Netflix-like services could weigh on game sales, genuine next-gen sports titles and other intriguing mobile offerings could help EA break out of its multi-year funk. .

As of this writing, most Wall Street analysts are optimistic. Indeed, many EA investors may wish to see an acquirer step in, but I don’t think that’s necessary for the stock to rebound; there is too much negativity built in. Additionally, EA seems more resilient than many realize.

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