Electronic Arts hasn’t been able to reach a new all-time high since July 2018, when it climbed to $151.26. However, the stock came close to that last month after the coronavirus panic in March was quickly forgotten.
Currently near $127 a share, Electronic Arts holds a rather high valuation at 29 times its expected fiscal 2021 profit. Unfortunately for fundamental analysts, in a zero-rate environment accompanied by record Fed stimulus, overvalued stocks tend to stay that way. Therefore, in order to anticipate a stock’s decline, we have to use a different set of tools.
The weekly chart above puts Electronic Arts’ development since 2012 into Elliott Wave context. The surge to over $151 in the summer of 2018 can be seen as a five-wave impulse. The pattern is labeled (1)-(2)-(3)-(4)-(5), where the five sub-waves of (1) and (3) are also visible.
Elliott Wave and Fundamental Analyses Agree on Electronic Arts
According to the theory, a three-wave correction follows every impulse. That is what we believe has been in progress for the past two years. The sharp selloff to $73.91 by December 2018 must be wave (a). The recent recovery to over $147 looks like a three-wave structure in wave (b). If this count is correct, wave (c) down should be expected from now on.
Wave (c) is supposed to breach the bottom of wave (a), meaning prices below $70 are likely. This means Electronic Arts can lose between 40% and 50% in the next selloff. In EA’s case, Elliott Wave analysis and the stock’s valuation point to the same bearish conclusion.
It has been increasingly difficult to take a negative stance these days, especially when it comes to the tech sector. Despite the current crisis caused by the pandemic, some stocks kept rising to the point where they are entirely disconnected from the fundamental value of the underlying companies. A fresh example is Snowflake, which reached a $73B valuation on its first trading day, giving it a price to sales ratio of ~140 based on its expected fiscal 2021 revenue. Despite doing business in a different industry and not being that overvalued, Electronic Arts seems poised for a significant drop, as well.
Similar Elliott Wave setups occur in the Forex, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!