The gaming industry experienced a windfall during the COVID-19 pandemic. It provided many people means to stay entertained and active from the confines of their homes. Despite the normalization of the health crisis, gaming seems to have become an irreversible and growing trend due to enhanced offerings fueled by the integration of advanced technologies such as 5G, AR, VR, and metaverse.

With metaverse being the next dimension of gaming, the industry is expected to reach a revenue of $208.60 billion globally in 2022 and grow at a 7.9% CAGR to a projected volume of $304.70 billion by 2027. Mobile gaming is expected to contribute to a majority of this growth.

However, investors should be careful to bank on fundamentally strong and growing companies in this space while chafing out the ones with a bleak outlook. Hence, we think it would be wise to buy Electronic Arts Inc. (EA - Get Rating) to make the most of the industry tailwinds and avoid Roblox Corporation (RBLX - Get Rating), given its weak fundamentals and decelerating growth.

Stock to Buy:

Electronic Arts Inc. (EA - Get Rating)

EA is an interactive digital entertainment company that develops, markets, publishes, and distributes games, content, and services for game consoles, PCs, mobile phones, and tablets worldwide. 

On September 12, 2022, EA announced a new partnership with KOEI TECMO and studio Omega Force to develop and release the next excellent hunting game. This new kind of hunting game is expected to expand the company’s reach in the global markets.

On September 9, EA announced Seattle-based Ridgeline Games as the newest studio dedicated to the Battlefield franchise. Ridgeline Games will be focused on developing a narrative campaign set in the Battlefield™ universe. This collaboration is set to add value and make the franchise more compelling.

For the fiscal 2023 first quarter ended June 30, 2022, EA’s total net revenue increased 13.9% year-over-year to $1.77 billion. The company’s operating income increased 37% year-over-year to $441 million during the same period. Its quarterly net income increased 52.4% year-over-year to $311 million, which translated to an EPS of $1.11, up 56.3% year-over-year.

Analysts expect EA’s revenue and EPS for the fiscal year 2022 (ending March 2023) to increase 6.3% and 2.3% from the prior year to $7.99 billion and $7.19, respectively. The company’s revenue and EPS for the next year are expected to grow 7% and 11.2% year-over-year to $8.55 billion and $7.99, respectively. The company also surpassed the consensus EPS estimates in each of the trailing five fiscals.

The stock has gained 6.5% over the past six months to close the last trading session at $126.92.

EA’s sound fundamentals and bright prospects are reflected in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

EA also has a B grade for Quality and Value. It is ranked #3 among 22 stocks in the Entertainment – Toys & Video Games industry. 

In addition to the above, we have also rated EA for Growth, Momentum, Stability, and Sentiment. Click here to access all ratings for EA.

Stock to Avoid:

Roblox Corporation (RBLX - Get Rating)

RBLX operates an online entertainment platform where users interact with each other to explore and develop user-generated and 3D experiences. The company’s offerings include Roblox Studio, Client, Education, and Cloud.

On September 9, 2022, it was reported that RBLX would introduce online advertising to diversify its income stream amid slowing growth in revenue, almost entirely dependent on in-app purchases.

For the fiscal 2022 second quarter ended June 30, 2022, RBLX’s loss from operations widened 19.1% year-over-year to $170.27 million. The company’s net loss attributable to common stockholders worsened by 25.9% from the previous-year quarter to $176.44 million. This translated to a 20% year-over-year deterioration in net loss per share for the quarter to $0.30.

Analysts expect RBLX’s loss per share for the fiscal year 2022 (ending December 2022) to widen 24.4% year-over-year to $1.21. Furthermore, the company’s loss per share is expected to worsen by 11.1% year-over-year to $1.34 for the next fiscal 2023.

The stock has plummeted 45.3% over the past year to close the last trading session at $45.07.

In concurrence with this bleak outlook, RBLX has an overall POWR Rating of F, which translates to a Strong Buy in our proprietary rating system. The stock has an F grade for Stability and Sentiment and a D for Growth, Value, and Momentum.

It is ranked last in the 22-stock Entertainment – Toys & Video Games industry. To see all POWR Ratings for RBLX, click here.

EA shares were unchanged in after-hours trading Thursday. Year-to-date, EA has declined -5.28%, versus a -17.25% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...

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