It may sound counterintuitive to hear that a free video game is set to drive earnings and revenues higher. That appears to be the case for Electronic Arts Inc. (NASDAQ: EA) after Respawn and EA released the game Apex Legends. Respawn is the gaming studio behind Titanfall, and the popularity of Apex Legends is being touted as an answer to the wildly popular Fortnite video game.

Apex Legends has been released for PC, Xbox and PS4. The free video game was said to bring in a million players in its first eight hours alone, and it had brought on 10 million players after just three days. This was a big part of the driving force for EA’s 16% rally last Friday.

Merrill Lynch upgraded EA to Buy from Neutral and raised its price objective to $110 from $95. While some games flame out quicker than others, Merrill Lynch’s Justin Post noted that positive user and press reviews suggest that Apex Legends may have staying power. Another issue was Twitch viewership, as it was the top game watched this weekend with 250,000 simultaneous viewers.

As a reminder, Fortnite was shown to have 80 million active users and to have generated over $3 billion in revenues. That’s from upsells within the game. Not too shabby for a free video game.

Merrill Lynch’s scenarios would have Apex Legends reach 40 million users, with another 25 million as an upside scenario. Its base case was 8 million users, and the downside case would be 5 million monthly users. Post said:

In our upside case scenario, Apex can grow to 80 million users and 25 million monthly active users, and monetizing at $3 dollars a month would add roughly $600 million in annual revenue. Probability weighting each potential earnings contribution case at 10%, 20%, 45% and 25%, and using a 25x multiple, we get a potential stock value add of $14 per share.

Post did admit that any call on Apex Legends at this early stage is highly speculative, but EA is very far off its highs and he sees the company as able to capitalize on the most important new genre in gaming. Another upside call here is that fiscal year 2020 estimates now seem to be de-risked and new data points (or a lack of data points) can drive big swings in the stock as investors evaluate the Apex Legends potential.

The Merrill Lynch investment rationale in this upgrade said this:

EA is a leading third party publisher in interactive entertainment industry with a valuable base of popular IP. EA is expected to realize ongoing margin expansion as more of its revenue comes from higher-margin digital sources, driving multiple expansion. We expect margin expansion to continue on the MTX/digital shift, the pace could accelerate if EA is successful with new Battle Royal title launches (Apex and Battlefield).

After a 16% gain to $97.60 on Friday, EA shares were last seen up another 6.5% at $103.90 Monday morning. The 52-week trading range is $73.91 to $151.26.

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