Electronic Arts Could Break Out in 2021

Nasdaq-100 component Electronic Arts Inc. (EA) rallied to a three-month high on Monday after announcing the acquisition of U.K.-based game developer and publisher Codemasters for $7.98 per-share in a transaction expected to close in the first quarter of 2021.  The rally marks the next step in a recovery from a three-month intermediate correction that erupted after the stock traded within four points of 2018’s all-time high at 151.

Surging Video Game Sales

Video game sales exploded in the first quarter when millions around the world found themselves at home with few pastimes, beyond streaming entertainment. The release of next generation game consoles has put a second fire under sales, with NPD Group noting that consumer spending across video game hardware, content, and accessories rose 35% year-over-year in November, 35% higher than in 2019. Year-to-date spending totaled a remarkable $44.5 billion, or 22% higher than the same time period in 2019.

Electronic Arts expects the deal to enhance the growth of the game maker’s racing franchises. Codemasters now offers a library of racing-themed games that include Formula One, DiRT, DiRT Rally, Grid, and Project Cars while EA’s Need for Speed franchise and Real Racing mobile game should fit nicely into EA SPORTS global franchises. The company also believes that “brands will enable our teams to innovate further, and meaningfully increase the delivery of content and experiences to a growing global audience for racing entertainment”.

Wall Street And Technical Outlook

Wall Street consensus is mixed due to the company’s history of sub-par performance. It’s now rated as a ‘Moderate Buy’ based upon 8 ‘Buy’ and 9 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $124 to a Street-high $165 while the stock opened Monday’s U.S. session about $6 below the median $144 target.

Electronic Arts got bought heavily after the March low, lifting within striking distance of the 2018 high while accumulation surged to an 18-month high. The stock reversed in August and reached the .618 Fibonacci rally retracement before turning higher in November. It’s now trading just 10 points below the prior peak while a buying surge into that level will complete the next stage in a potential cup and handle breakout pattern, with upside potential to 220.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.