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1 Video Game Stock to Avoid This New Year

By Harsh Chauhan – Jan 2, 2014 at 10:00PM

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Electronic Arts is in a difficult position but trades at a steep valuation, making it a stock to stay away from.

Electronic Arts (EA -0.89%)is in a tight spot. The company looks set unlock the achievement of being named the "Worst Company In America" by Consumerist for the third year running. According to Chris Morran of Consumerist, "We haven't even begun to ask for nominations from readers for the next Worst Company In America tournament, but some are already making the case for once again giving the Golden Poo trophy to reigning two-time WCIA winner Electronic Arts."

And according to Peter Drucker, the purpose of a business is to create and keep customers, but it looks like EA is not doing a good job and this could hurt its business going forward. 

Bumbling and fumbling
EA offended gamers at two important points last year -- first by botching up the launch of SimCity and then repeating the mistake again with the highly anticipated Battlefield 4. In the first case, it tried to enforce Internet connectivity on to gamers and ended up with overloaded servers, destroying gameplay.Next, it was expected that Battlefield 4 will be the answer to Activision Blizzard's (NASDAQ: ATVI) Call of Duty: Ghosts, but the game came gift-wrapped with bugs and errors.

EA executives have been accused of promising the world to both gamers and investors with Battlefield 4, and the company is now facing legal trouble. The situation at EA became so desperate that it decided to halt development of further games until the Battlefield issue was resolved but still a number of issues remain as the Battlefield 4 Top Issues Tracker shows as of this writing. This is not a good sign for a marquee game that is one of EA's most successful franchises.

Losing ground
The ultimate result of all this hasn't been good for EA. The company seems to be losing out to rival Activision Blizzard in terms of sales. For example, in the U.K., Call of Duty: Ghosts sold close to 2 million units in 2013, while Battlefield 4 languished with around 838,869 units, according to MCV. Moreover, while EA has kept mum over sales figures of Battlefield 4, Activision's Call of Duty: Ghosts crossed $1 billion in sales to retailers just a day after launch. 

Additionally, it looks like sales of Battlefield 4 took a huge hit in the second week of its release. According to HardwarePal, global sales of Battlefield 4 in the second week that ended on Nov. 9 fell close to 50%. For the whole of November, Activision's Call of Duty: Ghosts remained the best-selling game while Battlefield 4 was in second place, according to NPD. Moreover, the Activision Blizzard franchise was the top-selling game on both PS4 and the Xbox One after a month of sales of the new consoles.

What next?
With the year beginning with a big bungle, EA might find it difficult to replicate its 2013 performance. The stock had gained more than 60% in 2013, but has seen a steady decline over the past couple of months. Looking ahead, EA seems to have a promising pipeline with games such as The Sims 4, EA Sports UFC, FIFA World Cup, and Dragon Age: Inquisition. However, given the recent experience that investors and gamers have had at EA's hands, it isn't a sensible buy at 31 times trailing earnings, at least for now.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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