The Wall Street Journal - 16.08.2019

B12| Friday, August 16, 2019 THE WALL STREET JOURNAL.

Electronic Arts Scores an Extra Life

The videogame publisher’s market value has shed 30% in past year, but new titles and coming console cycle should power up shares

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

‘Apex Legends’ players competed at the X Games in Minneapolis this month. ‘Apex’ has been a surprise hit.

SEAN M. HAFFEY/GETTY IMAGES

Care.com’s days as an indepen-

dent matchmaker could be limited.

New York-based activist inves-

torEngine Capital LPis calling

for the company to explore a sale

after The Wall Street Journal’s

March investigation which showed

it provided limited vetting of its

caregivers, sometimes with tragic

results. In subsequent months,

both Care.com’s chief financial of-

ficer and chief executive have said

they would resign.

Down more than 52% in the

year to date, Care.com’s shares

rose 7.7% Thursday—their largest

single-day gain this year.

Engine isn’t alone in suggesting

extreme measures. In a conference

call for investors this month, one

analyst asked about rebranding or

separating Care.com’s growing

Care@Work platform, which pro-

vides employer-sponsored care.

In response, founder Sheila

Lirio Marcelo said management

felt the brand to be “quite strong.”

That confidence is questionable.

According to Engine’s letter, lead

independent director George Bell’s

purchase of Care.com stock last

week represents the only instance

of an insider purchasing shares

since August 2014.

It also notes another director

sold out her entire position over

the past few months, though she

has since received shares of re-

stricted stock.

Care.com has no controlling

owner.

According to its most recent

proxy filing, the company’s largest

shareholder,CapitalGLP, owns

13.8%, while Ms. Marcelo owns

8.3%. The Journal reported Engine

has accumulated more than 3% of

the company’s shares, citing a per-

son familiar with the matter.

The activist suggests an optimal

buyer would be a company with an

established online marketplace

business. It namesIACas an ex-

ample, a holding company that no-

tably owns Match Group and ANGI

Homeservices—two companies

that similarly match service pro-

viders with users.

The question is whether any

company can restore lost trust

when it comes to child care. Tak-

ing a page from Jane Austen, par-

ents’ good opinion once lost may

be lost forever.

—Laura Forman

A bit off its game last year,
Electronic Artsis in a good posi-
tion to start leveling up.
That might seem like a risky
call for any videogame publisher
that doesn’t happen to own “Fort-
nite.” The wildly popular multi-
player game has made a fortune
since launching a free-to-play ver-
sion in late 2017, racking up an es-
timated $3.9 billion in revenue. It
has even made a fortune for some
of its players, with the latest
champion winning a $3 million
prize. But it also has shaken up
the videogame establishment,
making long-established shooter
games and their associated busi-
ness models look dated.
Little coincidence, then, that EA
andActivision Blizzard—the in-
dustry’s two largest game publish-
ers—have shed more than 30% of
their market value over the past
12 months.
But while many big games have
come and gone over the years, his-
tory suggests publishers with di-
versified portfolios tend to sur-
vive. EA, now 37 years old, has
survived more successfully than
most. The company has a well-es-
tablished perch in several of the
top genres that include sports,
shooters, role-playing, racing and
PC games. Its portfolio of sports
games alone generates roughly $3
billion in annual revenue, or about
60% of the company’s total, esti-
mates Todd Juenger of Bernstein.
History suggests now is a good
time to buy. The current genera-
tion of PlayStation and Xbox con-
soles is ebbing ahead of new ma-
chines expected fromSonyand
Microsoftin next year’s holiday

season. Doug Creutz of Cowen

notes that, over the past three

console cycles, videogame stocks

have outperformed the S&P 500

by an average of 26 percentage

points in the 12 months leading up

to launch.

EA’s shares have trailed the

Nasdaq so far this year. But the

stock—which, at 19 times forward

earnings, is the cheapest of its

peers—has several potential driv-

ers in the months ahead. The com-

pany is adding a new mode called

Volta to this year’s FIFA game,

coming in September, that mimics

street soccer. Its “Madden NFL”

and “NHL” games also are getting

their annual updates this quarter.

EA also faces far less risk this

year of getting wounded in a holi-

day shootout. Last year its “Bat-

tlefield” offering suffered from a

crowded release slate against big-

ger shooter properties including

“Call of Duty” and “Red Dead Re-

demption.” This year, EA’s coming

“Star Wars” game called “Jedi:

Fallen Order” should face less di-

rect competition from Activision’s

annual “Call of Duty” update and

the new “Borderlands 3” from

Take-Two Interactive. In a report

Monday, Mr. Creutz said preorder

activity indicates the new “Star

Wars” game is “tracking very

strongly” ahead of its planned re-

lease in mid-November.

And then there is “Apex Leg-

ends,” EA’s surprise free-to-play

hit employing the same Battle

Royale design used by “Fortnite.”

Several analysts say the game’s

popularity seems to have cooled,

but EA countered in its most re-

cent earnings call that “Apex” has

drawn a dedicated audience of 8

million to 10 million weekly play-

ers and remains on track to gener-

ate between $300 million and

$400 million in Live Services reve-

nue for the fiscal year that ends in

March.

That is a realistic bar that could

see upside with new seasons or

fresh content offerings in the

game. For EA, it just adds one

more bullet to a well-loaded clip.

—Dan Gallagher

Forward price/earnings multiple

Source: FactSet

Take-Two Interactive

Zynga

Ubisoft

Nasdaq Composite

Activision Blizzard

Nintendo

Electronic Arts

26 times

25

24

23

21

20

19

Care.com

Needs

Better

Supervision

Shoppers Shrug Off Caution Signals

Strong results from Walmart suggest recession fears from an inverted yield curve may be overblown

If the Treasury market is signal-
ing an imminent recession, some-
body forgot to tell U.S. consumers.
The Commerce Department on
Thursday reported that retail sales
rose 0.7% in July from a month
earlier, easily beating the 0.3%
gain economists polled by The
Wall Street Journal expected and
putting the number 3.4% above its
year-earlier level. There wasn’t any
one thing behind the strength in
spending—it was broad-based.
Furniture stores, gasoline sta-
tions, department stores, clothing
stores all registered sales gains.
The standout was nonstore retail-
ers, a category dominated byAma-
zon.com, which rose 2.8%. That
was probably a reflection of con-
sumers’ enthusiasm for the online
giant’s Prime Day sale in July.
Amazon’s biggest bricks-and-
mortar competitor, and now proba-
bly its most important rival in on-
line sales domestically, also is
performing well:Walmarton
Thursday reported same-store
sales rose 2.8% from a year earlier
in its second quarter ended July

31. That was much better than the

2.1% gain that analysts polled by

Refinitiv estimated. The company

raised its profit forecasts for the

year and its shares rose sharply.

That isn’t a sign that America’s

largest retailer is worried the

economy is about to weaken.

And yet investors seem deeply

worried, with the brief drop in the

yield on the 10-year Treasury yield

below the two-year yield seen as

the latest signal that things are in

danger of going badly amiss for

the economy. Such yield-curve in-

versions, as they are called, fre-

quently have been a sign of a

looming recession.

Indeed, the part of the curve

that economists have determined

has the best forecasting record—

the difference between the 10-year

and three-month yield—has been

inverted for a while now. A Federal

Reserve Bank of New York model

that uses it now puts the probabil-

ity of a recession occurring in the

next year at 39%. That is the high-

est it has been since early 2007,

when it got as high as 45%. By the

end of that year, the recession had

begun.

The yield-curve inversion also

counts as one more reason the

Federal Reserve is widely expected

to cut rates when it meets in Sep-

tember. Fed policy makers are

skeptical of the yield curve’s preci-

sion as a forecasting tool but,

given their worries about their

ability to combat a recession in a

low-rate environment, they proba-

bly don’t want to take any chances.

Considering how well American

consumers are feeling, however,

the Fed’s ounce of prevention

might not cure much of anything.

—Justin Lahart

OVERHEARD

Among other things, 2019

was to be the year of the fold-

ing phone. But the laws of

physics keep getting in the way.

Samsung had planned to re-

lease a foldable phone in April,

but it was forced to delay it

after several test versions of

the device went bad in review-

ers’ hands. Huawei later de-

layed the launch of its own

foldable phone called the Mate

X from June to September, cit-

ing the need to improve the

quality of the screen.

More work is needed, appar-

ently. After attending an event

at Huawei’s Shenzhen head-

quarters on Thursday, Techra-

dar reported that the company

is unlikely to launch the Mate

X before November. That is

good for Samsung, which plans

to launch the fixed-up version

of its Galaxy Fold next month.

This assumes, of course,

that the market for such de-

vices won’t have folded by

then.

No Sign of China Slowdown at Alibaba

China’s economy is slowing,

but e-commerce giantAlibaba

Group Holdinghas found a way

around the problem: pushing into

smaller, poorer cities.

The country’s answer toAma-

zon.comincreased revenue by

42% last quarter compared with

the same period of 2018, beating

estimates on S&P Global Market

Intelligence. Alibaba’s expansion

in newer, unprofitable businesses

such as food delivery and cloud

services boosted growth. But rev-

enue from the core business—on-

line marketplaces Taobao and

Tmall—also increased 26%, allay-

ing worries that China’s economic

slowdown may have deterred con-

sumer spending.

Much of the growth has come

from less-developed areas of

China. During the quarter, Ali-

baba ran a shopping campaign

akin to Black Friday called 6.18

Mid-Year Shopping Festival. The

18-day event has been around for

years, but Alibaba achieved re-

cord sales this year. More than

70% of the increase in the com-

pany’s annual active consumers

rowing losses in Alibaba’s unprof-

itable segments such as digital

media and cloud services. But Ali-

baba’s undisputed leadership in

Chinese e-commerce likely also

helped the company attract mer-

chants in new areas without hav-

ing to spend too much to acquire

them.

The company’s dominance also

makes merchants willing to pay

for exposure on its platforms, es-

pecially during a major shopping

festival.

Alibaba mostly makes money

in two ways: advertising for mer-

chants on its Taobao site or col-

lecting commissions for transac-

tions on its Tmall site.

Alibaba’s shares have gained

22% so far this year, outperform-

ing many other Chinese internet

names includingTencent Hold-

ingsandBaidu, but the stock is

still 20% below its peak in June

of last year. Whether the stock

can reach a new high depends on

whether the company can keep

up last quarter’s sales momen-

tum.

—Jacky Wong

during the quarter came from

lower-tier regions.

Targeting China’s smaller cities

doesn’t seem to have dented Ali-

baba’s profit margins much. Oper-

ating profit still rose 27% from a

year ago, excluding a one-off

share-based payment in the pre-

vious year.

Partly this was thanks to nar-

Alibaba’s China marketplace

quarterly revenue, percentage

change from a year earlier

Source: the company

Note: Includes customer management

and commission businesses

50

0

10

20

30

40

%

2015 ’16 ’17 ’18 ’19

Sales at nonstore retailers, a category dominated by Amazon.com rose 2.8%.

RICHARD B. LEVINE/ZUMA PRESS