The video games industry became extremely popular during the height of the COVID-19 pandemic, with the emergence of remote lifestyles. Companies such as Electronic Arts Inc. (EA) benefited significantly from the bump in digital gaming.
While the world has normalized significantly from the disruptions caused by the pandemic, increasing smartphone penetration and technological advancements should continue to fuel the industry’s growth.
EA is a digital interactive entertainment company that develops, markets, publishes and delivers games, content and services for consumers to play on a variety of platforms, including game consoles, personal computers, mobile phones and tablets.
The games and services are based on a portfolio of intellectual property that includes brands such as Apex Legends, Battlefield, The Sims, Madden NFL, Star Wars and FIFA Ultimate Team.
Despite the current uncertain macroeconomic environment, EA maintains its guidance for fiscal year 2023. The company expects net revenues to be between $7.60 and $7.80 billion and net profits between $793 and $815 million. Earnings per share are expected to be between $2.79 and $2.87. In addition, operating cash flow is expected to be between $1.60 and $1.65 billion.
EA’s CEO Andrew Wilson said, “With great games built around powerful IP, created by incredibly talented teams, and an outstanding commitment to our live services, FY23 will be a year of innovation and growth for Electronic Arts.” “We have a strong base of highly engaged players, rich IP and a resilient business model, which we will continue to invest in to deliver growth in FY23 and beyond,” he added.
The company beat consensus EPS and revenue estimates in its last reported quarter. EA’s earnings per share were 45% above consensus expectations, while revenues were 3.5% ahead of analysts’ estimates.
The video game industry is heating up, with Microsoft Corporation (MSFT) Activision Blizzard, Inc. taking over (ATVIA) for $68.70 billion and Take-Two Interactive Software, Inc. (TWO) to acquire Zynga for $12.70 billion. EA is rumored to be pursuing a sale with Disney, Apple, Amazon and Comcast-NBCUniversal is labeled as the potential buyers.
According to Mordor Intelligence, the gaming market expected to grow at a CAGR of 8.9% to $339.95 billion by 2027.
EA’s stock is up 0.2% so far, but fell 6.5% over the past year to close its last trading session at $132.17.
Here’s what could affect EA’s performance in the coming months:
Robust financial data
EA’s total net revenue increased 13.9% year-over-year to $1.76 billion for the first quarter ended June 30, 2022. Net revenue increased 52.4% year-over-year to $311 million. The company’s operating income increased 37% year-over-year to $441 million. In addition, earnings per share were $1.11, up 56.3% year over year.
Favorable analyst estimates
Analysts expect EA’s earnings per share for fiscal 2023 and 2024 to rise 2.4% and 11.5% year-over-year to $7.19 and $8.02. Revenue for fiscal 2023 and 2024 is expected to grow 6.4% and 7.1% year-over-year to $8 billion and $8.57 billion. It beat Street EPS estimates in three of the lagging four quarters.
Profitability higher than industry
In terms of backlog-12 months gross profit marginEA’s 74.37% is 47.2% higher than the industry average of 50.52%. Similarly, the 24.60% trailing 12-month levered FCF margin is 210.6% higher than the industry average of 7.92%. In addition, the stock’s lagging asset turnover ratio came in at 0.56%, compared to the industry average of 0.49%.
POWR ratings show promise
EA has an overall rating of B, which is equivalent to a Buy in our POWR ratings system. The POWR ratings are calculated by taking into account 118 different factors, each of which is optimally weighted.
Our proprietary rating system also evaluates each stock based on eight different categories. EA has a B-score for quality, in line with profitability that is higher than the industry.
It has a B-score for sentiment, in line with analysts’ favorable estimates.
EA is number 3 out of 22 stocks in the Entertainment – Toys and Video Games industry. click here to access EA’s growth, value, momentum and stability ratings.
Bottom Line
The gaming market is expected to grow significantly in the long term. EA is trading above the 50 and 200 day moving averages of $128.40 and $129.15, indicating an uptrend. Given the robust financial data, favorable analyst estimates, strong sales and earnings expectations and profitability that exceeds the industry’s, it may be wise to buy the stock now.
How does Electronic Arts Inc. work? (EA) Stacking up against his peers?
EA has an overall POWR rating of B, which is equivalent to a buy rating. You may want to consider investing in the following Entertainment – Toys & Video Games stocks with an A (Strong Buy) or B (Buy) rating: Spin Master Corp. (SNMSF), JAKKS Pacific, Inc. (YAK), and DoubleDown Interactive Co., Ltd. (DDI).
EA shares traded at $130.26 per share Monday afternoon, down $1.91 (-1.45%). Year-to-date, EA is down -0.98%, versus a -14.09% gain in the benchmark S&P 500 index over the same period.
About the author: Dipanjan Banchur
Since he was in primary school, Dipanjan was interested in the stock market. This led to a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More…
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