The macroeconomic headwinds have put a strain on the entertainment industry. However, the industry's prospects remain positive due to digitalization and technological innovation. So, quality entertainment stock Electronic Arts Inc. (EA) could be worth buying. However, Roblox Corporation (RBLX) is best avoided, considering its weak fundamentals.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the entertainment industry.
According to Statista, total revenue in the entertainment market is anticipated to expand at a CAGR of 10.6% to reach $53.13 billion by 2027. This growth can be attributed to various factors, such as the increasing popularity of streaming platforms, the rise of virtual reality technology, and the growing demand for live events and experiences.
Also, the toys and games industry is valued at $261.65 billion this year and is expected to grow at a CAGR of 9.9% over the next five years. Moreover, investors’ interest in gaming stocks is evident from the VanEck Vectors Video Gaming and eSports ETF’s (ESPO) 17.6% returns over the past three months.
However, the entertainment industry (toy and video game sectors) is struggling in the United States due to a variety of issues. One major challenge is the growing competition from online streaming services and social media, which have garnered a large percentage of people’s leisure time.
Also, the growing popularity of mobile gaming has had an impact on the toy and video game sectors, as more people prefer easy and quickly accessible entertainment options on smartphones and tablets.
Let us dive deeper into the fundamentals of the featured stocks:
Stock to Buy:
Electronic Arts Inc. (EA)
EA is a global gaming company known for popular franchises like Battlefield, The Sims, and FIFA. They develop, market, and distribute games across various platforms, utilizing digital and retail channels for sales.
EA’s trailing-12-month net income margin of 13.08% is 270.2% higher than the 3.53% industry average. Its trailing-12-month ROTA of 7.56% is 434.2% higher than the 1.41% industry average.
For the six months ended September 30, 2023, EA’s net revenue and gross profit increased 4.5% and 4.1% year-over-year to $3.84 billion and $3.01 billion, respectively.
The company generated operating income and net income of $919 million and $801 million, up 5.9% and 31.3% from the prior year period, respectively. Moreover, its EPS increased 34.4% year-over-year to $2.93.
Street expects EA’s revenue to increase 3.9% year-over-year to $7.63 billion for the year ending March 2024. Its EPS is expected to grow 10.7% year-over-year to $7.17 for the same period. It surpassed EPS estimates in three of four trailing quarters. EA’s shares have gained 12.8% over the past three months to close the last trading session at $139.42.
EA’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
EA also has a B grade for Value, Stability, Sentiment and Quality. It is ranked #2 out of 19 stocks in the B-rated Entertainment - Toys & Video Games industry. Click here for the additional POWR Ratings for Growth and Momentum for EA.
Stock to Sell:
Roblox Corporation (RBLX)
RBLX is an online entertainment platform company providing tools like Roblox Studio for 3D content creation, Roblox Client for user exploration, and Roblox Education for learning experiences. It serves a global customer base and offers a collaborative human co-experience platform.
RBLX’s trailing-12-month gross profit margin of 17.27% is 64.7% lower than the industry average of 48.96%. Also, its trailing-12-month EBITDA margin of negative 38.15% compare with the industry averages of 19.26%.
For the third quarter that ended September 30, 2023, RBLX’s revenue came in at $713.23 million. Its loss from operations widened marginally over the prior year’s quarter to $300.04 million. The company’s total cost and expenses increased 23.9% year-over-year to $1.01 billion.
For the same quarter, its net loss came in at $277.16 million and also its loss per share came in at $0.45.
For the year ending December 31, 2024, RBLX’s EPS is expected to remain negative $1.89. It failed the consensus EPS estimates in three of the trailing four quarters. RBLX’s shares have lost 12.9% over the past month to close the last trading session at $40.41.
RBLX’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, which equates to a Sell in our proprietary rating system.
It is ranked last in the same industry. It has a D grade for Value, Stability and Quality. To see additional RBLX’s ratings for Growth, Sentiment and Momentum, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
EA shares were trading at $138.43 per share on Monday morning, down $0.99 (-0.71%). Year-to-date, EA has gained 1.18%, versus a 2.56% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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