Computer game industry pioneer Electronic Arts Inc. (EA) has underperformed the market significantly year-to-date (YTD), down 12.8% versus the S&P 500's 1% loss in 2018. Now, one team of analysts on the Street is reconsidering their bullishness on shares of the Redwood City, Calif.-based entertainment company, suggesting that tougher times may lay ahead for investors, as outlined by Barron's.
Various Headwinds Limit EA's Valuation Expansion in Near Term
In a note to clients on Monday, KeyBanc Capital Markets analyst Evan Wingren reduced his rating on Electronic Arts from overweight to sector weight, admitting that his team was wrong about the video game maker's growth potential. He contributed his weaker outlook to a "lack of positive catalysts" facing the entertainment company, alongside doubt that Electronic Arts can post results in line with the Street's estimates in the next fiscal year.
“We have been wrong, as it has corrected sharply from its highs and underperformed; despite this correction, visibility remains low, we expect negative estimate revisions, and we have diminished confidence in the pipeline, which is likely to continue to limit valuation expansion in the near term," wrote Wingren.
The KeyBanc analyst is particularly disappointed with the departure of key leaders for games "Battlefield V" and "Anthem." He added that there is "low visibility" on the potential for live services within both mentioned titles.
EA's shares shrank 3.5% on Monday following the downbeat report, and are up roughly 0.5% on Tuesday morning at $91.62.
Not all are so bearish. In July, Needham analysts wrote a note in which they dubbed Electronic Arts the "Netflix of Gaming," expecting the company to benefit from a widespread shift to "games as a service" wherein consumers subscribe to video games rather than purchasing them outright. In August, Needham lowered its price target from $170 to $150, still reflecting a near 64% upside from current levels.