Will Electronic Arts Stock Recover To Its Pre-Inflation Shock Level?

Electronic Arts stock (NASDAQ
NDAQ
: EA) currently trades at $119 per share, more than 20% below its level in February 2021, and it can see higher levels over time. Electronic Arts is one of the leading gaming companies known for its sports games, including FIFA. EA stock was trading at around $122 in early June 2022, just before the Fed started increasing rates, and is now marginally below that level, compared to 15% gains for the S&P 500 during this period. EA stock has seen a 15% fall in a month due to its downbeat guidance for net bookings in the coming quarters. The company’s revenues have been stable at around $2 billion in recent quarters. There has been a steady decline in the inflation rate in response to the Fed’s aggressive rate hike plan – although investors still have concerns about a potential recession.

Returning to the pre-inflation shock level means that EA stock will have to gain more than 25% from here, and we believe it will materialize over time. We estimate Electronic Arts’ valuation to be around $140 per share, implying over 15% gains. This is because the company should continue seeing robust demand for its sports franchises and new releases, including Madden 24 and NHL 24. Also, the company should continue to expand its gross margin due to the increased adoption of digital downloads that offer higher margins. For perspective, EA’s gross margin has improved from 73% in 2019 to 76% in 2023 (the fiscal ends in March). This trend is expected to continue and bolster EA’s earnings growth.