Gaming company Electronic Arts (EA) was the weakest S&P 500 stock on July 5, falling 4.6% to close at $93.60. Players’ response to EA’s Apex Legends 2, launched July 2, has been underwhelming and is concerning investors.
In EA’s last reported quarter, its player base rose to 500 million, driven by user engagement across its popular gaming franchises. Apex Legends, launched on February 4, quickly gained 50 million players within a month and attracted several new players—over 30% of its players were new to EA.
Why Apex Legends 2 disappointed players
Twitch Tracker (AMZN) reported that Apex Legends 2 has an average of 40,000 viewers daily, significantly fewer than the game’s first installment, which had 100,000 viewers daily and attracted 10 million players within three days of its launch. The release boosted EA stock by 27.0% between February 4 and February 15. Based on the first installment’s stupendous success, Robert W. Baird analyst Colin Sebastian expects Apex Legends to add $500 million in sales in fiscal 2020.
Apex Legends was released following the success of free-to-play battle-royale games such as Fortnite and PUBG. Stakeholders were excited to see if Apex Legends could give Fortnite‘s player base of 250 million a run for its money. While Apex Legends is free to play, it generates revenue through in-game purchases. Players can “pay $10 for the Apex Legends Season Two Battle Pass which includes special items, skins, and a new character named Wattson.”
EA aimed to build on Apex Legends’ success and improve maps, weapons, and characters in the second installment. So why has players’ response been lukewarm to Apex Legends 2?
Are the game’s features unsatisfactory, or has gamers’ tryst with battle-royale games plateaued? The gaming industry is dynamic, and player preferences tend to change frequently. Gaming companies need to watch for changes in player behavior and respond accordingly.
What’s ahead for EA investors
Should EA investors be worried after this pullback? Wedbush analyst Michael Pachter believes fears may be overblown—although Twitch views are important, it’s still too early to pass judgment. Stephens analyst Jeff Cohen also sees the reaction as drastic, and thinks the stock is oversold.
While Apex Legends 2 has disappointed so far, EA still has one key driver. EA has reported that it is looking to launch Apex Legends on mobile and in partnership with Tencent Games in China, which could attract several players. China, the world’s biggest gaming market, accounts for 25.0% of global gaming revenue.
Is EA a good pick?
EA stock has been volatile, falling from $151.26 last July to $74 in December. Gaming peers Activision Blizzard (ATVI) and Take-Two Interactive (TTWO) have also fallen significantly, trading 43.0% and 16.2% below their 52-week highs, respectively.
However, gaming companies started recovering this April. EA stock has gained 18.6% this year, while ATVI and TTWO have returned 4.2% and 13.9%. EA’s forward PE multiple of 18.3x makes the stock seem a bit expensive considering the company’s expected earnings growth of 7.1% in 2020, 12.3% in 2021, and 9.2% in the next five years. If EA can beat these estimates, its stock could move higher.
Wall Street is optimistic about EA. The 27 analysts tracking EA have an average 12-month target price of $112.10 for the stock, which implies a 20.0% upside from its current price.