Electronic Arts (EA) weakened last year, falling ~50.0% between July and December to $73.91, close to its three-year low. However, the stock has gained 17.1% this year. The gain has been somewhat offset by broader market weakness in the last two months. Whereas EA’s sales fell ~4.0% in fiscal 2019, analysts expect the company’s revenue to return to growth in fiscal 2020 and beyond, with its sales growing 6.0% compounded annually in the next three years.
Gaming stocks tend to do well in downturns
The macro environment has been volatile, and we are in the middle of one of the longest bull runs in stock market history. While no one knows when the next recession will hit, it’s worth noting that gaming companies tend to do well in downturns.
According to BMO Capital’s Gerrick Johnson, “The video game industry is quite defensive.” He adds that “interactive entertainment is one of the most inexpensive forms of entertainment as measured by cost divided by time consumed. Should an economic downturn take root, we would anticipate video game consumption to grow as those who lose (or are fearful of losing) their jobs, may pull back on discretionary spending in other bigger ticket areas.”
Encouraging financial metrics
EA’s expects its net bookings to rise 3.2% to $5.1 billion in fiscal 2020, and its gross margin to improve year-over-year from 73.3% to 75.3%. It expects its operating cash flow to improve marginally, from $1.54 billion to $1.57 billion.