Buy Electronic Arts For the 2024 Rally

Key Points

• Shares have been rallying hard this month after years of sideways trading. 
• Several signs suggest that EA is still undervalued compared to its peers. 
• Its most recent video game titles look set to easily beat analyst expectations for the coming quarters.  

Having traded mostly sideways for the past two years, albeit with a slightly downward lean, shares of video game maker Electronic Arts Inc NASDAQ: EA have been rallying hard this month. They're up more than 10% and on track for their longest run of up days since May of last year. 

It will make for pleasant reading for any investors who've been holding on and hoping for a return to the heights of the pandemic years. As one of the most favorably exposed industries to whole populations being forced to stay at home, EA and its peers benefited much. But video game makers, like many software and e-commerce companies, have struggled to maintain the momentum since the pandemic receded. Things are starting to look up, however.

The VanEck Video Gaming and eSports ETF NASDAQ: ESPO, for example, through October of last year, had fallen more than 50% from its all-time high, but it's now up 40% from those lows. Looking at EA specifically, we can see they outperformed their peers in the fall but have lagged them on the bounce. Their shares fell just 25% from their pandemic high, but, even counting this month's rally to date, EA's stock is only up 20% from those lows. This looks set to change, however. 

Bullish Outlook

Earlier this week, the team at Bank of America came out with a bullish upgrade to EA shares, moving them from a Neutral to a Buy rating. They consider EA to still be trading at a discount to its broader peer group and feel this is "unwarranted'. 

Their fresh price target of $150 points to a further upside of at least 15% from where shares were trading on Thursday, and were they to hit it, this would have them at a new all-time high. Chief among the drivers behind this bullish call was the long list of attractive tailwinds building behind EA, both in this quarter and beyond it, into next year. 

As you might expect, they revolve, for the most part, around the company's roadmap of games. There are signs that the recently released FC 2024 is outperforming analyst expectations, and investors will be watching closely to see if this filters through to the company's next earnings report. That's due early next month, and it's fair to say expectations are already starting to increase based on how much momentum has been on the bid in recent weeks.

On this basis, the team at M Science today raised their estimates for EA's next earnings report. While the company's Sims game has underperformed, both its Apex Legends and FC 2024 titles should more than make up for it. The holiday season always has the potential to be a boon for video game makers, and if the sales momentum carries through the end of the year, we could be looking at a stellar 2024. 

Getting Involved 

Analyst Omar Dessouky from M Science also pointed out that EA's relative valuation is at a five-year low, making this a compelling entry point in terms of the longer-term opportunity on offer. Fiscal 2025 is, after years of slowing expansion, expected to show solid growth in both PC and console gaming markets, so EA investors have plenty to look forward to. 

Some caution might be advised regarding an entry in the near term, as the stock's relative strength index (RSI) has popped to more than 75 with this month's rally, suggesting highly overbought conditions. This tends to happen after a consistent run of green days where little to no selling happens and rarely lasts long.

It wouldn't be unusual for shares to find a cool patch, and in many ways, this should be welcomed. Consolidating above $130 for a while would set them up nicely for a push into the $140s and beyond, making it all that easier to firmly break out of the sideways range they've been stuck in.