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[Updated: 9/21/2021] EA Stock Decline
The stock price of Electronic Arts (NASDAQ: EA) has seen a decline of 8% over the last week. Much of the decline came as the company confirmed that its release of the Battlefield 2042 game will now be delayed until November. This didn’t sit well with the investors who hoped for an early release translating into more sales during the holiday season. There are already signs of slowing growth in user engagement levels after a sharp rise during the pandemic and gaming stocks at large have seen lower levels over the recent months. That said, EA stock has outperformed its peers with 2% gains in the last six months, compared to a loss of 12% for TTWO, 13% loss for ATVI, and a decline of 20% for ZNGA. We have maintained our view that EA stock is undervalued and any dip can be used as a buying opportunity for long-term investors. But what about the near-term? Will EA stock continue its downward trajectory over the coming weeks, or is a rise in the stock imminent?
According to the Trefis Machine Learning Engine, which identifies trends in the company’s stock price using ten years of historical data, returns for EA stock average around 2.5% in the next one-month (twenty-one trading days) period after experiencing a 7.8% fall over the previous week (five trading days), implying that the stock will likely rebound in the near term. Also, the company in a press release, reiterated its net bookings guidance for fiscal year 2022, despite the release date for Battlefield game being pushed to Nov 19, compared to Oct 22 earlier.  But how would the returns fare if you are interested in holding EA stock for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning Engine to test Electronic Arts stock expected return. You can test the chance of recovery over different time intervals of a quarter, month, or even just 1 day!
MACHINE LEARNING ENGINE – try it yourself:
If EA stock moved by 5% over five trading days, then over the next twenty-one trading days EA stock moves an average of 3.1%, with a 56% probability of a positive return over this period, based on the stock’s historical performance.
Some Fun Scenarios, FAQs & Making Sense of Electronic Arts Stock Movements:
Question 1: Is the expected return for Electronic Arts stock higher after a drop?
Answer: Consider two situations,
Case 1: Electronic Arts stock drops by -5% or more in a week
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Case 2: Electronic Arts stock rises by 5% or more in a week
Is the expected return for Electronic Arts stock higher over the subsequent month after Case 1 or Case 2?
EA stock fares better after Case 1, with an expected return of 3.1% over the next month (21 trading days) under Case 1 (where the stock has just suffered a 5% loss over the previous week), versus, an expected return of 2.2% for Case 2.
In comparison, the S&P 500 has an expected return of 3.1% over the next 21 trading days under Case 1, and an expected return of just 0.5% for Case 2 as detailed in our dashboard that details the expected return for the S&P 500 after a rise or drop.
Try the Trefis machine learning engine above to see for yourself how Electronic Arts stock is likely to behave after any specific gain or loss over a period.
Question 2: Does patience pay?
Answer: If you buy and hold Electronic Arts stock, the expectation is over time the near-term fluctuations will cancel out, and the long-term positive trend will favor you – at least if the company is otherwise strong.
Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays for most stocks!
For EA stock, the returns over the next N days after a -5% change over the last five trading days is detailed in the table below, along with the returns for the S&P500:
You can try the engine to see what this table looks like for Electronic Arts after a larger loss over the last week, month, or quarter.
Question 3: What about the expected return after a rise if you wait for a while?
Answer: The expected return after a rise is understandably lower than after a drop as detailed in the previous question. Interestingly, though, if a stock has gained over the last few days, you would do better to avoid short-term bets for most stocks.
It’s pretty powerful to test the trend for yourself for Electronic Arts stock by changing the inputs in the charts above.
[Updated: 8/10/2021] EA Stock Update
Electronic Arts (NASDAQ: EA) recently reported its FYQ1 2022 results, which were better than Trefis’ and the street estimates. The company reported revenues of $1.34 billion, in-line with our forecast of $1.35 billion, and $1.28 billion consensus estimate. The company’s adjusted EPS of $0.79 was comfortably above the $0.75 per Trefis and $0.62 consensus estimates. The sales were bolstered by the company’s new games – Mass Effect Legendary Edition and It Takes Two, and continued growth from Apex Legends. While the revenues were down 4% y-o-y, it was a tough comparison to the prior year quarter, which benefited from Covid-19 related lockdowns, as people were confined to their homes, eschewing more public forms of entertainment. This resulted in higher user-engagement levels for gaming companies, including Electronic Arts. Furthermore, last year’s quarter had 14 weeks, compared to 13 this year.
Looking forward, the company has raised its outlook for revenues to be around $7.4 billion, and adjusted EPS to be $6.40 for the full-fiscal 2022, compared to earlier forecast of $7.3 billion and EPS of $6.15. While the company has revised its earnings outlook upward, it still appears to be conservative, in our view. Despite an upbeat quarter, and a strong outlook, EA stock has declined over 4% over the last five trading days. This can be attributed to a larger sell-off in gaming stocks with mounting concerns of declining user-engagement levels following the reopening of economies post Covid-19.
However, we maintain our Electronic Arts Valuation of $170 per share, based on expected adjusted EPS of $6.80 and a P/E multiple of 25x, reflecting a 25% premium to the current market price of $136. While a decline in user-engagement levels (y-o-y) is expected with people now venturing out after being vaccinated, the overall engagement levels will likely remain higher than they were before the pandemic, in our view. We continue to believe that EA stock is undervalued at the present levels, and investors can use the current dip as a buying opportunity for long-term gains.
[Updated: 8/2/2021] EA Q1 Earnings Preview
Electronic Arts (NASDAQ: EA) is scheduled to report its fiscal FYQ1 2022 results on Wednesday, Aug 4. We expect the company to likely post revenue and earnings above the consensus estimates. Electronic Arts, in-line with other gaming companies, is likely to benefit from higher gaming engagement levels seen over the recent quarters, bolstering its overall revenue growth. Furthermore, our forecast indicates that Electronic Arts’ valuation is $170 per share, which is 18% above the current market price of around $144, implying EA stock has more room for growth, in our view. Our interactive dashboard analysis on Electronic Arts Pre-Earnings has additional details.
(1) Revenues expected to be above the consensus estimates
Trefis estimates Electronic Arts’ fiscal Q1 2022 revenues to be around $1.35 billion, slightly above the consensus estimate of $1.28 billion. Despite the economies opening up with vaccination programs underway in multiple countries, the user engagement levels for gaming has so far remained on the higher side. Furthermore, the company made multiple acquisitions over the last fiscal year, including that of Codemasters and Glu, which will bolster the overall top-line growth. Electronic Arts’ fiscal Q4 2021 total bookings (refers to revenue plus change in deferred revenue) were up 19% y-o-y to $1.5 billion, primarily reflecting continued growth in its e-sports franchises. Our dashboard on Electronic Arts Revenues offers more details on the company’s segments.
2) EPS likely to be above the consensus estimates
Electronic Arts’ fiscal Q1 2022 adjusted earnings per share is expected to be $0.75 per Trefis analysis, well above the consensus estimate of $0.62. The company’s adjusted net income of $358 million in fiscal Q4 2021 reflected a 14% rise from its $314 million figure in the prior-year quarter. For the fiscal 2022, we expect the adjusted EPS to be higher at $6.81 compared to $5.75 in fiscal 2021.
(3) Stock price estimate 18% above the current market price
Going by our Electronic Arts’ Valuation, with an EPS estimate of $6.81 and a P/E multiple of 25x in 2022, this translates into a price of $170, which is 18% above the current market price of around $144. In fact, at the current market price of $144, EA stock is trading at 21x its 2022 EPS estimate of $6.81, compared to P/E multiple of 37x for its peer Take Two Interactive TTWO and 25x for Zynga ZNGA , implying EA stock is more attractively valued.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year.
While EA stock may rise in the near term, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Xylem vs. Electronic Arts.
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