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Here's Why Electronic Arts Stock May Have Limited Downside

It may not be the highest returner among video game stocks, but console game developer Electronic Arts (NASDAQ: EA) may have more limited downside. That's the conclusion the team for The Motley Fool's "The Gaming Show" came to recently. Every week on Motley Fool Backstage Pass, the team talks about video game stocks; in this episode, recorded on Jan. 10, they ranked 10 buying opportunities from first to last. EA took the final spot among those 10 companies, and here Fool analysts Clay Bruning and Sanmeet Deo talk about EA with contributor Jon Quast.

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Jon Quast: And coming in number 10. The 10th place here is EA games, symbol EA. Clay is going to talk to that one about us and explain why he ranked it where he did. It looks like Clay ranked that one number nine, so pretty close to where our collective ranking was.

Clay Bruning: Yeah. EA's a company I hold near and dear to my heart. It was one of my first video games, if not my first video game I ever played. I think it was Madden 2004 with Michael Vick on the front of the cover. It was also one of my first investments, probably 10 to 12 years ago now. As I kind of thought of the company's various portfolio of sports games. It's almost like a subscription. I was buying it every single year as were millions of other Americans and maybe it's not a matter of people around the world.

But I ranked EA low for a few reasons. The first is the sales growth is kind of low, mid, single-digits, it looks like right now, there's really not a lot of growth trajectory or shareholder value trajectory here in my opinion, with the exception of improving margins over time. After taking a quick look, it doesn't really look like it had a lot of success in terms of bolstering a margin over the last couple of years. I just think a lot of the other names from this list of ten have much clear sales growth, trajectory, and potential for improving operating margins over time, with maybe the exception of Activision Blizzard there. We'll talk about some of their main competitors in terms of Activision Blizzard, Take-Two Interactive, etc.

I do like that they acquired some increased exposure to the mobile gaming with the Glu Mobile deal. I don't think that's necessarily the best-in-class asset they could've acquired. But an interesting acquisition nonetheless, to gain some more exposure to really the fastest segment in video games being mobile gaming.

So definitely a great rock solid company if you're looking for, a less volatile name that's making money, distributing dividends, buybacks, kind of a total return play, this might be a good name to add to your portfolio but in terms of outperforming some of these other names, I find it hard to create a narrative where that's feasible personally.

Quast: I'm in the same boat as you. What's interesting is we all ranked this fairly low, with the exception of Sanmeet, he ranked it toward the middle, but I'm in the same boat as you there, Clay. We're not saying that EA is a bad company with these ranks. We're trying to just relatively say what is the return potential here, EA, it's hard to see compared to some of the other ones on the list, and so point well-taken.

Sanmeet Deo: I would chime in there. I guess I was surprised that it was ranked so low given I ranked it in the middle of the pack. But I guess the reason I ranked it where I ranked is, it is a great name. Again, like what Jon said, all the rankings we're doing here. We're ranking and based on the 10 that we have here and what we view them relative to each other is nothing in terms of recommendation of not to buy it or anything like that. Just with that caveat for sure, we pretty much like most of these companies, there's a ton of companies that we could have chosen from, but Jon narrowed it down to some of these more popular ones, I guess.

But EA, to me, always seems like one of those almost like a subscription video game business to some extent with their franchises in sports, and they haven't performed as well with some of the other games. But they're still pretty good and they also are getting into like mobile and mobile gaming. Mobile gaming is a little bit of a faster growing segment of the game market. That's probably one of the reasons why I ranked it a little higher compared to some of the other ones, but it was interesting here you guys have points on EA what you thought. Maybe it may not be relatively as strong as the other ones.

Clay Bruning has no position in any of the stocks mentioned. Jon Quast has no position in any of the stocks mentioned. Sanmeet Deo has no position in any of the stocks mentioned. The Motley Fool owns and recommends Activision Blizzard and Take-Two Interactive. The Motley Fool recommends Electronic Arts and recommends the following options: long January 2023 $115 calls on Take-Two Interactive. The Motley Fool has a disclosure policy.


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