The video gaming industry gained huge popularity during the height of the COVID-19 pandemic, with the emergence of remote lifestyles. Companies like Electronic Arts Inc. (EA) benefited significantly from the bump in digital gaming.
While the world has significantly normalized from the disruptions caused by the pandemic, increasing smartphone penetration and technological advancements should keep driving the industry’s growth.
EA is a digital interactive entertainment company that develops, markets, publishes, and delivers games, content, and services that consumers can play on various platforms, including game consoles, personal computers, mobile phones, and tablets.
Its 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 conditions, EA has maintained its guidance for fiscal 2023. The company expects its net revenue to come between $7.60 to $7.80 billion and net income between $793 to $815 million. Its EPS is expected to come between $2.79 to $2.87. In addition, its operating cash flow is expected to be in the range of $1.60 to $1.65 billion.
EA’s CEO Andrew Wilson said, “With amazing games, built around powerful IP, made by incredibly talented teams, and outstanding engagement in our live services, FY23 is set to be a year of innovation and growth for Electronic Arts.” “We have a strong foundation of deeply 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 the last reported quarter. EA’s EPS was 45% above consensus estimates, while its revenue beat analyst estimates by 3.5%.
The video game industry is heating up, with Microsoft Corporation (MSFT) acquiring Activision Blizzard, Inc. (ATVI) for $68.70 billion and Take-Two Interactive Software, Inc. (TTWO) acquiring Zynga for $12.70 billion. It was rumored that EA has been pursuing a sale with Disney, Apple, Amazon, and Comcast-NBCUniversal being labeled as the potential buyers.
According to Mordor Intelligence, the gaming market is expected to grow at a CAGR of 8.9% to $339.95 billion by 2027.
EA’s stock has gained 0.2% in price year-to-date but declined 6.5% over the past year to close the last trading session at $132.17.
Here’s what could influence EA’s performance in the upcoming months:
Robust Financials
EA’s total net revenue increased 13.9% year-over-year to $1.76 billion for the first quarter ended June 30, 2022. Its net income increased 52.4% year-over-year to $311 million. The company’s operating income increased 37% year-over-year to $441 million. In addition, its EPS came in at $1.11, representing an increase of 56.3% year-over-year.
Favorable Analyst Estimates
Analysts expect EA’s EPS for fiscal 2023 and 2024 to increase 2.4% and 11.5% year-over-year to $7.19 and $8.02. Its revenue for fiscal 2023 and 2024 is expected to increase 6.4% and 7.1% year-over-year to $8 billion and $8.57 billion. It surpassed Street EPS estimates in three of the trailing four quarters.
Higher-than-industry Profitability
In terms of trailing-12-month gross profit margin, EA’s 74.37% is 47.2% higher than the 50.52% industry average. Likewise, its 24.60% trailing-12-month levered FCF margin is 210.6% higher than the industry average of 7.92%. Furthermore, the stock’s trailing-12-month 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, equating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. EA has a B grade for Quality, in sync with its higher-than-industry profitability.
It has a B grade for Sentiment, consistent with its favorable analyst estimates.
EA is ranked #3 out of 22 stocks in the Entertainment – Toys & 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 its 50-day and 200-day moving averages of $128.40 and $129.15, indicating an uptrend. Given its robust financials, favorable analyst estimates, strong revenue and earnings guidance, and higher-than-industry profitability, it could be wise to buy the stock now.
How Does Electronic Arts Inc. (EA) Stack Up Against its Peers?
EA has an overall POWR Rating of B, equating to a Buy rating. You might 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. (JAKK), and DoubleDown Interactive Co., Ltd. (DDI).
EA shares were trading at $130.26 per share on Monday afternoon, down $1.91 (-1.45%). Year-to-date, EA has declined -0.98%, versus a -14.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining 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.
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