BMO Hits Electronic Arts (EA) With Stock Downgrade

Electronic Arts (NASDAQ: EA), more commonly referred to as EA, has had a long, strange history. Back in 2018, it was the fifth most hated company in a 24/7 Wall Street study, beating out even Foxconn, a company that had to install anti-suicide netting around its plants to ensure workers would stop jumping to their deaths from the roof. EA has made some gains since then, but not everyone is convinced of its positive future.

EA Guidance Treading Water, Leaving Analysts Concerned

Gerrick Johnson, an analyst with BMO, has dropped the company's outlook from “outperform” to “market perform” over concerns about its overall trajectory. The downgrade contributed to some hefty losses for EA as the stock dropped 0.7% ahead of the market open. It since recovered some of those gains, but as of this writing, it's hovering around its previous close of $107.92.

The biggest concern Johnson expressed was focused on EA's future plans. One of EA's biggest new properties, “Apex Legends”, held its ground on guidance for the 2020 fiscal year. That would normally be fairly decent news, except for one problem: guidance for that game emerged back in May 2019, and the guidance has not been fundamentally altered since then.

The Future Guidance Isn't Looking So Hot Either

The news got worse for EA, as Johnson noted several other problems besides a stagnant leader. Management, Johnson noted, hasn't been clear on plans to monetize “Star Wars Jedi”, an issue that has plagued EA for some time now since the rise and fall and kind-of-rerise of “Star Wars Battlefront 2”.

Johnson acknowledges that there has been some recovery on the Star Wars front for EA—a look at “Star Wars Jedi Fallen Order” does for that—and that there's “good upside potential” to be had therein, but history tells us that Star Wars fans can be mercurial beasts. Any misstep will not be taken kindly, a point that's likely doubly true with EA, which has dropped the ball on Star Wars gaming before.

It's not just Star Wars that has Johnson concerned, either; while EA has made an excellent recovery with its lineup of sports annuals after the “Fortnite” frenzy, the issues for fiscal 2021 aren't exactly drawing a lot of attention.

Issues Valid In Isolation, But Consider the Aggregate

Johnson has a range of valid points here, and all these valid points don't add up to a bright future for EA. This is a company that spent a lot of time being actively cursed by the gaming community and as such doesn't have a lot of goodwill on its side. Any mistake, therefore, will be amplified accordingly and cause plenty of fallout.

Johnson also didn't mention the less-than-stellar results seen for EA's newest attempt at a flagship title, “Anthem,” which might best be described as a giant flop thanks to several bugs, crashes, issues of loot quality and difficulty inherent in multiplayer-heavy gameplay. The dependence on microtransactions certainly didn't help matters.

However, the future isn't looking that grim for EA. Our own recent analysis suggests some potential profit opportunities for EA traders, and there are a lot of destabilizing elements to come in this market.

First, in a little over four months, we've got E3 coming up, which will bring in plenty of new interest. Second, we've also got a new console generation poised to hit around the holiday shopping season. That's going to prove a drag on this year's releases as companies typically wrap up their projects for the current generation in preparation for the next launch, but it also opens up a significant opportunity for new launches to come. Customers will need games to play on all those consoles, after all, which is a serious sales opportunity for gaming operations like EA. With reports suggesting EA plans to release eight new titles over the next two years, recovery from a sluggish 2020 could be at hand.

Finally, with ongoing coronavirus fears, we also have a consumer likely less interested in a night out, which could lend home entertainment stocks like EA, or like Netflix (NASDAQ: NFLX) or Disney+ (NYSE: DIS) a boost.

In the short term, Johnson has a clear case for a drop in performance expectations. This isn't a great time for EA right now thanks to a market that's pulling back to ready itself for a push into new consoles. Yet it's clear that EA isn't letting grass grow under its collective feet. It may be a market perform right now, but that may just mean a buying opportunity to come.