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We came across a bearish thesis on Electronic Arts Inc. (EA) on Substack by SuperJoost. In this article, we will summarize the bears’ thesis on EA. Electronic Arts Inc. (EA)'s share was trading at $116.56 as of Jan 24th. EA’s trailing and forward P/E were 29.89 and 14.37 respectively according to Yahoo Finance.
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Electronic Arts (EA) is facing significant structural challenges, as evidenced by its recent earnings pre-announcement and lowered financial guidance for 2025. The company, once thriving on its Live Services business model, is now projecting a decline in this segment, which is expected to cost them around $540 million in lost revenue compared to previous estimates. The decline is attributed to underperformance in two key areas. First, EA's flagship football franchise, including EA Sports FC (formerly FIFA), has seen its Ultimate Team feature experience a 15% year-over-year decline, signaling potential saturation in the games-as-a-service model that has been a primary driver of growth for over a decade. Second, the company’s highly anticipated RPG release, Dragon Age, failed to meet expectations, attracting only half of the expected player engagement, which forced a reduction in third-quarter net bookings to $2.215 billion, down from the previous forecast of $2.475 billion.
This setback comes at a critical time as the competitive landscape in the gaming industry is intensifying, with upcoming releases like Take-Two’s Grand Theft Auto VI and the potential launch of new Nintendo hardware. EA’s management, while emphasizing a long-term strategy and plans for gameplay innovations, faces a tough challenge in revitalizing its Ultimate Team monetization model amid growing market competition. EA’s recent stock price drop of 17% reflects both the immediate earnings impact and broader concerns about the company’s strategic direction.
This situation also casts doubt on Take-Two Interactive, which saw its stock price dip in the wake of EA’s news. With Grand Theft Auto VI expected to launch soon, questions loom over whether Take-Two could face similar challenges. Industry-wide, the shift from content innovation to distribution innovation is apparent, and EA's struggles highlight the vulnerability even of market leaders during transition periods. Moving forward, success in the gaming industry will increasingly depend on innovative distribution and engagement models to capture value in an ever-fragmented market.
Electronic Arts Inc. (EA) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 46 hedge fund portfolios held EA at the end of the third quarter which was 40 in the previous quarter. While we acknowledge the risk and potential of EA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than EA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.