Why Electronic Arts Jumped 17% in January

What happened

Shares of Electronic Arts (NASDAQ:EA) gained 16.9% in value last month, according to data from S&P Global Market Intelligence. As with many stocks, EA shares rebounded along with the broader market in January. EA stock had been in a downward spiral during the second half of 2018, after the company issued downward revisions to its earnings guidance. 

The stock rebounded amid positive comments from one analyst who upgraded the stock last month. Also, EA gained three new sponsors for its Madden professional esports league. However, the company issued another disappointing earnings release at the beginning of February, which put another speed bump in its recovery path.

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So what

One analyst upgraded the stock, citing the popularity of the company's EA Sports titles as a potentially big draw for EA's subscription services, a key growth initiative for the game maker. Besides boosting digital revenue and margin, a subscription service makes it easier for gamers to access new content updates for the company's games, thereby encouraging more spending and engagement. Live services, including sales of in-game updates, are the lifeblood of EA's business, making up 42% of total revenue.

However, on Feb. 5, EA reported its fiscal third-quarter earnings that showed the company is struggling to hang on to its installed base. Live services revenue was $784 million, down $3 million from the year-ago quarter. Poor sales of Battlefield V were the main culprit, and management blamed the performance on a heightened competitive environment during the holiday quarter, especially with battle-royale shooters such as Fortnite still drawing a massive player base. Investors clearly saw this as a red flag that Fortnite has taken players away from the companies' top games.  

On a positive note, EA's esports efforts received welcome news in January. EA announced three new sponsors -- Bose, New Era, and Snickers -- for the NFL Madden Championship Series. The company is very optimistic about its esports road map. EA's 2018 FIFA eWorld Cup Final saw a significant increase in viewership over the prior year. Management sees an opportunity to expand its esport events and grow viewership, and the three new sponsors are a sign that those efforts are coming to fruition.

Now what

Despite the weak third-quarter results, EA's stock is up about 5% since the end of January. Last week, the company quietly released a new battle-royale game called Apex Legends, which has shot to the top of the charts on Amazon.com's Twitch game streaming site. Investors are obviously hopeful that the company has found a legitimate Fortnite competitor, especially since Apex Legends offers a unique twist on the battle-royale genre and is free to play, like Fortnite.

Also, EA has a potential blockbuster game releasing in the fiscal fourth quarter, called Anthem. With a few more games expected to release by the end of the year, and with esports viewership on the rise, it may not take long for EA to bounce back.