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1 Entertainment Stock to Sell and 1 to Buy in 2022

Growing technological advancements have made the entertainment industry more digital and interactive. Having capitalized on the windfall opportunities provided by the pandemic, the sector looks set to keep growing well beyond it. While struggling industry participant Unity (U) might be best avoided, it could be wise to invest in fundamentally strong entertainment stock Electronic Arts (EA), given its ability to capitalize on the industry tailwinds. Let’s discuss this in detail…

The entertainment industry experienced a windfall during the COVID-19 pandemic due to a significant surge in demand for digital entertainment. It provided many people means to stay entertained and active from the confines of their homes. The integration of advanced technologies such as 5G, artificial intelligence (AR), virtual reality (VR), and metaverse should boost growth in the entertainment space.

Since content creation and consumption are set for a paradigm shift with the advent of the metaverse, the entertainment industry is expected to reach a revenue of $29.35 billion globally in 2022 and grow at an 8.5% CAGR to a projected volume of $40.74 billion by 2026.

Furthermore, the entertainment industry in the United States is expected to reach $7.44 billion in 2022 and $10.01 billion by 2026, growing at a CAGR of 7.7%.

However, investors should be judicious while investing in entertainment stocks. It would be wise to sell fundamentally weak entertainment stock Unity Software Inc. (U) and buy Electronic Arts Inc. (EA) to make the most of the industry tailwinds.

Stock to Sell:

Unity Software Inc. (U)

U operates as a platform for creating and running real-time three-dimensional content. The company’s platform has two segments: Create Solutions and Operate Solutions. Its offerings include Unity Ads and Unity IAP (In-App Purchases) to help users monetize content, Multiplay for multiplayer game hosting, and Vivox to enable game player-to-player communications.

On September 12, 2022, it was announced that AppLoving Corp (APP) had scrapped its plans to acquire U after the latter opposed its $17.5 billion offer. This deal could have combined two prominent providers of tools for mobile developers.

For the second quarter of the fiscal year (ended June 30, 2022), U’s non-GAAP loss from operations widened by 6351% year-over-year to $44.13 million. As a result, the company’s non-GAAP net loss came in at $53.14 million, 3862.5% worse than the previous-year quarter. U’s quarterly non-GAAP net loss per share worsened 1700% year-over-year to $0.18.

Analysts expect U’s loss per share during the third quarter of the fiscal year (ending September 2022) to widen 150% year-over-year to $0.15. The company’s loss for the current fiscal is also expected to deteriorate 95.7% year-over-year to $0.43.

The stock has plummeted 23.3% over the past month and 73.4% year to date to close the last trading session at $36.86.

In concurrence with this bleak outlook, U has an overall POWR Ratings of D, which translates to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The stock has a D grade for Stability and Value. It is ranked #21 in the 22-stock Entertainment – Toys & Video Games industry.

In addition to the above, we have also rated U for Growth, Momentum, Sentiment, and Quality. To see all POWR ratings for U, click here.

Stock to Buy:

Electronic Arts Inc. (EA)

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 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 2023 (ending March 2023) to increase 6.3% and 2.3% from the prior year to $7.99 billion and $7.18, 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 $7.98, respectively. The company also surpassed the consensus EPS estimates in each of the trailing five fiscals.

The stock has gained 0.9% intraday to close the last trading session at $122.93.

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. It also has a B grade for Quality and Value. It is ranked #5 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.

EA shares were unchanged in after-hours trading Tuesday. Year-to-date, EA has declined -8.23%, versus a -18.53% 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.


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