Electronic Arts' Apex Legends: The Gains Won't Last

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About: Electronic Arts Inc. (EA)
by: Infinity Research
Summary

Apex Legends is a free to play game that relies on loot boxes and season passes to generate revenue, but with an uncertain future for loot boxes, profitability is uncertain.

Battle royale as a genre has already peaked and the release of Apex Legends is too late to fully capitalize on its popularity.

EA’s stock has been boosted tremendously by the release of Apex Legends and is now heavily overvalued as it will not be able to perform as expected.

Electronic Arts (NASDAQ:EA) (NASDAQ:EA) releases their battle royale game, Apex Legends, on February 4, sending their stock soaring by almost 30%. This dramatic price change was due mostly to the vastly positive reception of the game and the popularity of Epic Games’ Fortnite, another battle royale game. However, the large spike in value might not have been justified and now the company is propped up on some false notions. EA will likely have trouble profiting off of the new free to play game as loot boxes are becoming increasingly criticized globally for their likeness to gambling. The battle royale genre, the genre Apex Legends is looking to capitalize on, has been declining recently and has already peaked, reducing the potential customer base. Apex Legends is not capable of generating the revenue many expect it to, and the stock is greatly overvalued as a result.

Monetization

As a free to play game, Apex Legends makes its money off of loot boxes, known as Apex Packs within the game, where players can acquire different skins (for weapons and characters), dances, and fun one-liners. For a player to purchase an Apex Pack, they must first acquire a large amount of the in-game currency, Apex Coins, rewarded by leveling up and completing challenges. However, EA relies on players choosing to buy Apex Coins, motivated to do so with the hope of winning a specific item from their Apex Packs. By paying for the Apex Coins, the players are able to open more and more Apex Packs and increase their chances of obtaining what they want. For those that are skeptical that people may choose to pay for these loot boxes, take a look at Counter-Strike: Global Offencive and it’s incredibly lucrative skin market. Fortnite is another free to play battle royale game, and made $2.4 billion in 2018 alone, more than any other game ever. Fortnite follows a similar strategy as Apex, allowing players to purchase their in-game currency, V-bucks, to buy certain skins and dances. They also sell a Battle Pass that unlocks a certain set of skins and dances for a certain time period, usually lasting ten weeks. EA is expected to release their first Season Pass for Apex Legends soon which should be another large revenue source for the game.

Considering all of this information, EA looks like it has set itself up nicely to profit off of its new game release. Unfortunately for EA, it looks like the system of loot boxes may be under fire. Belgium has banned loot boxes for video games, ruling that it is a form of gambling that is being promoted to children. The Netherlands has also banned loot boxes after coming to the conclusion that it is a form of gambling. Both of these bans happened in 2018, and the anti-loot box sentiment is spreading. In Europe as a whole, it seems that loot boxes are close to getting fully banned. In America, the Federal Trade Commision began looking into the issue during November 2018 and seems to be supporting the ban of loot boxes. If loot boxes are to be banned, Apex Legends will lose its primary income source and become significantly less profitable. Although its battle pass will likely remain, they can only be bought once every ten weeks, as mentioned earlier. The Fortnite Battle Pass costs $9.99 for the full package, so EA will likely follow a similar price point to stay competitive. This is not enough revenue to justify the spike in EA’s value, especially without the loot boxes. With reduced revenue opportunity, the game’s profitability will become dramatically reduced.

Popularity

Battle royale games may be the most popular games on the market right now. Fortnite saw unprecedented growth in the prior year, but that growth may have reached an end. SuperData reported that Fortnite’s revenue dipped 48% in January from December, its peak. The December peak was likely due in part to a Christmas sales boost, but nonetheless the decrease is quite severe and marks a bleak future for Fortnite. To make matters even worse, this was before the release of Apex Legends, meaning that the revenue dip was not influenced much, if at all, by Apex Legends. The decreasing numbers for Fortnite are a reflection on the battle royale game genre as a whole, alluding to an overall decrease in interest for the game genre. If the market that Apex Legends is working in is no longer as strong as it used to be, the overall performance of the game will be reduced as less and less people are interested in the game.

In its first month, Apex Legends had 50 million players, a feat that is not to be undercut. It is very impressive, but that hype is likely to die down quite quickly. The rapid growth has already decreased, as Apex Legends logged 25 million users within its first week. The decrease in player growth from 25 million players in one week to 50 million players in a month is about 50%, a dramatic shift in growth. Although the growth is still very impressive, the game is not growing as fast as it likely should be, if it were to even be close to Fortnite in popularity. The first week was like the pilot for Apex Legends, the following weeks of February were the determinant in the game’s ability to maintain the growth. It couldn’t. Many analysts seem to be comparing the growth of Fortnite to the growth of Apex Legends, though the comparison is not fair at all. Fortnite came into a genre that was not nearly as popular as it is now, not even advertising its battle royale mode as its main game aspect. Apex Legends was able to ride off of Fortnite’s success in the battle royale genre and capitalize off of the market’s incredible popularity. With slowing growth in both the overall battle royale market and Apex Legend’s players, the game just isn’t going to be able to achieve what is expected of it.

Resulting Valuation

EA has had a rough twelve months, losing about 25% of its value at the time of writing this article. The company has lost over 35% of its value since peaking in July; before the release of Apex Legends, the company was down 46% from its peak. EA has been on a downtrend for almost a full year now due to their consistent misses on their game releases. Fifa hasn’t performed well in a while, Madden NFL sales have been decreasing, the Star Wars Battlefront games have disappointed, Battlefield especially disappointed EA with low sales, the list goes on and on. The point is, EA really needed a solid game to bounce back on that could provide a new large revenue source for the company. Nothing that EA is currently working on looks like it could be that, and Apex Legends can’t be that with its inability to churn much profit. I expect EA stock to reach a price of about $74 within the next four months, about a 25% decrease. A time period of four months will be ample enough to prove the declining growth of the game without it ever reaching close to the levels Fortnite has reached at its peak. In addition, four months is likely enough time for the loot box debate to start making serious ground in legislature, further reducing the game’s company impact. The realization that EA’s stock is now propped up on a false notion will be the cause of the price drop. A 25% drop has been extrapolated by observing the spike in the stock as a result of the successful launch, working in tandem with the poor release of their new game. It also takes into account their lost revenue opportunity from Apex Legends and its general downtrend before its release. EA can’t go on, continuing to put out subpar games that are unable to make the company any money. As a result, I don’t believe that EA is a strong company in the foreseeable future and has no current path to change that. Apex Legends is not the savior for EA that it may have been made out to be, instead it is just another one of their games that won’t be able to deliver on its promise of high profits.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.