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Electronic Arts Stock Down Amidst Disappointing Apex Legends Season 2 Numbers

Jul 5, 2019
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Electronic Arts (NASDAQ:EA) stock is struggling this week as viewing numbers from Twitch (owned by Amazon NASDAQ:AMZN) came in well below market expectations. Season 2 launched with viewer numbers so far failing to top 50,000 on Amazon’s game oriented video streaming service when it had as many as 100,000 as recently as March, but it’s probably fair to say this is a bit of a knee-jerk reaction. Apex Legends took the world by storm when it first launched as the sleeper hit of EA’s game line-up with no major marketing or announcements when it was launched in February, signing up a million players in 8 hours, 25 million players in its first week and earning EA $92 million in its first month of operation.

For those who didn’t follow it at the time, the game was announced a day before EA’s disappointing earnings which saw the stock collapse by about 13% (here) followed startlingly by an immediate recovery and then some jumping by almost a third as it was realised the firm had a major hit on its hands with Apex Legends. Since then however, trading in EA stock has looked fairly range bound as the cold hard realities of a not brilliant Anthem launch have contrasted against the success of Apex Legends.

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The stock had been building for the last couple of weeks as season 2 approached however the numbers are clearly being viewed negatively by investors, albeit in light markets given the 4th of July holiday as well as other broader economic factors.

EA Drop Factors - 4th of July, Trade War, Non-Farm Payroll and the Fed

It’s a tricky week for investors overall though and this may be contributing to a worse than expected picture for EA. The 4th of July holiday in the US on a Thursday often precipitates lighter trading on the Friday as a lot of people take the Friday off and make it a long weekend. When markets are light, volatility can spike somewhat given the lack of liquidity potentially available to absorb any particular increases in the demand or supply of a given stock.

Additionally, the week has seen the market be somewhat relieved due to the indication that the possibility of a deal between the US and China in their trade war is back on the cards with the two countries agreeing to restart talks aimed at resolving the dispute generally weighing favourably on the market and technology stocks in particular, especially ones which have significant exposure to China (EA itself doesn’t have huge China exposure although the general uplifting of the market would have helped it slightly).

However today the big news came out that US non-farm payroll numbers were significantly stronger than expected, clocking in at 224,000 against an expected 160,000. Particularly surprising given that on Wednesday, the bellwether ADP employment numbers (which are seen as showing the direction the NFP numbers will go in) were significantly weaker than expected. Why is this a concern for stock prices I hear you ask? Well, as many will have been following, President Trump has been particularly unhappy with his hand-picked beleaguered Fed Chair Jerome Powell, sniping at him that he should be cutting interest rates and at least seeming to indicate that his job may be at risk if he doesn’t, controversial given that the Fed Chair technically doesn't report to the President but to congress.

For his part, Powell indicated after the last FOMC meeting that the Fed would look to support the market by considering cutting interest rates twice this year. After that, the market priced in a 25 basis point cut in July, but given the strong NFP numbers, this will be trickier to justify as job growth is strong. Here then is the disconnect we live within. Strong job growth means that a central bank can’t ease monetary policy and support the markets. As ridiculous as it sounds, every day we continue into this record bull market run, it becomes clearer to see that many fundamental aspects of market efficiency are increasingly broken and the market is reliant on the Fed and government handouts to maintain its growth.

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So although it’s unclear what the big picture will bring with respect to interest rates (Powell may still guide the FOMC to a cut somehow, perhaps due to conflicting indicators), it’s important to remember that there are still more fundamental factors which will drive the Electronic Arts stock price. Viewer numbers on Twitch may be less than expected but this is by no means an indication that revenue from the game itself has fallen off a cliff. Certainly it’s a possible indicator but there’s a bit too much tea-leaf reading going on here on the basis of just one metric for me.

EA may have seen its best days in terms of player counts and revenue from Apex Legends, widely seen as the F2P battle royale game to best challenge Fortnite but it is likely still making reasonable money from the game. Trading volumes today in EA were high with almost 3x average daily volume changing hands however across the technology stocks we follow here, everything else was trading today on smaller than average total volumes which definitely signals that there was less happening in the market today so this may have been another factor in the drop.

We’ll see how EA’s numbers stack up in a few weeks when its earnings become public.

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