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Electronic Arts Is One Tough Stock

By Nicholas Rossolillo - Feb 24, 2018 at 2:16PM

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A disappointing Star Wars movie and controversial game design couldn't derail the video game maker. There are lessons here for investors.

There has been a lot of noise surrounding Star Wars these days, not all of it good. Paired with turbulence in the stock market, it had the potential to derail the licensee of Star Wars video games, Electronic Arts (EA -2.17%). The stock was resilient after its last quarterly results, though, and shares continue to hover around all-time highs. Here are the lessons for investors.

EA Chart

Data by YCharts.

First, some background color

In November 2017, about a month ahead of the release of Star Wars: The Last Jedi, EA released the sequel to its popular Star Wars Battlefront game. There were the usual in-game perks for those who ordered the game early, and hype was also built when it was announced that all expansion packs would be free for all players.

The excitement for many quickly faded, though, when EA said in lieu of charging for expansion packs, it was introducing "loot crates." It was concluded that the in-game purchase system amounted to a pay-to-win incentive.

The backlash that ensued went beyond just the gaming community; some lawmakers around the world concluded that loot crates amounted to gambling (since the contents are random) and made motions to block their use. In light of the outcry, EA suspended the in-game purchases ahead of the game's release, leading some analysts to conclude that the video game company would miss its business performance estimates.

Then there was The Last Jedi movie, which received mixed reviews from fans. There was concern that it might bleed over into the game's performance, too. Add in some undesirable stock market moves in early February, and one might conclude that Electronic Arts was in for a rough patch. None of that transpired, though. How did the company beat the odds?

Four young men sitting on a couch playing video games.

Image source: Getty Images.

The problem with bad news and big companies

Electronic Arts is a resilient business; one game isn't enough to make or break it. Management did report that sales from Battlefront 2 were disappointing, falling short of its expectation of 8 million units sold by "less than 1 million units," but there was enough good going on to make up the difference. The global community of players increased strongly, resulting in 39% higher net bookings from live online services compared with the same holiday period last year. High points in the portfolio were The Sims, FIFA soccer, and Madden football.

There is a lesson here for investors: Bad news doesn't necessarily mean it's time to bail on a stock. In the case of a company like EA, which is well diversified and has multiple areas of growth working at the same time, ignoring the noise is a good policy. If anything, buying more on a dip -- assuming the company's foundation isn't cracking -- is an even better policy.

Sometimes new growth initiatives fail. That's a normal part of business ownership, and that's what has happened here with EA. However, management said its loot box debacle was a good learning experience, and it still sees in-game spending as an area of untapped potential.

Thus, while it can be chalked up as a failure this time around, expect some adjustments to be made and another attempt at purchasable bonus items later on. Meanwhile, there is still plenty of growth happening to keep EA's shares buoyant. 

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