Is Electronic Arts Stock a Buy?
Electronic arts (NASDAQ: EA) saw its share price jump 34% last year as the pandemic led to higher levels of engagement in its core holdings. Nonetheless, the company’s forecast for fiscal 2021 (ending March 31, 2021) calls for a slight increase in revenue from the previous year. Can EA generate enough long-term growth to justify buying the stock today?
I think so – here’s why.
Favorable winds from the industry
All signs continue to point to long-term growth in the video game industry, which is good news for major game producers like Electronic Arts. Following the engagement trends seen during the pandemic, market researcher Newzoo expects the industry to grow again this year, reaching $ 189 billion in total gaming revenue in 2021, up from $ 175 billion. Last year.
A few trends support this estimate, including the increasing penetration of Sony PlayStation 5 and Microsoft Xbox Series X / S consoles, launched in the fall. In addition, mobile gaming has become the main driver of the industry’s revenue growth. The adoption of 5G wireless connection speeds is a catalyst for greater adoption on mobile platforms. And earlier this year, EA announced an agreement to acquire Glu Mobile (NASDAQ: GLUU) for $ 2.1 billion.
Additionally, content creators and game streamers are driving increased demand for computing peripherals, reflecting a growing interest in games. The leading producer of graphics chips, NVIDIA, recently reported that it sees a long track of growth in its gaming segment, with gaming laptop sales continuing to overtake the mainstream laptop market.
As new players enter the game, Electronic Arts has the resources to continue investing in new content to increase revenue and generate above-market returns, as it has done for the past several decades.
EA generates tons of cash
EA has generated $ 1.93 billion in free cash flow over the past four quarters. To show confidence in the future, management issued the company’s first dividend in the third quarter of the fiscal year. The dividend is equivalent to a quarterly payment of $ 0.17 per share, or $ 0.68 per year.
Making video games is a very profitable business, especially for companies with the most players. EA has a large player base to monetize as it owns some of the most popular titles on the market including FIFA, Madden, Battlefield, The simsand the free shooting game Apex Legends. During the second quarter of fiscal year earnings report, EA announced that it had 330 million unique accounts for all of its games.
Management believes it can push the viewership and player count of its EA Sports titles alone to 500 million. And it has a pipeline of new sports releases and developing experiences. The impending acquisition of Glu Mobile will bring Tap Sports Baseball on mobile devices, and EA is also strengthening its racing portfolio with the recent acquisition of Codemasters.
The company certainly has its chess pieces positioned to go on the offensive in the video game industry.
That leaves a problem in the minds of investors: If EA sees so many opportunities in the space, why is it heading towards just 1.1% revenue growth in FY 2021?
A key factor that is overlooked is the multi-year shift that is taking place in the industry from physical purchases to digital spending on games. In the nine-month period ended in December, packaged game sales – which account for nearly 15% of EA’s total revenue – fell 32% year-over-year. Excluding sales of packaged products, EA’s total turnover would have increased by more than 13% instead of the reported 3%.
It is quite possible that EA could see its revenue growth accelerate over the next five years as pack sales continually decline as part of its sales while digital revenues continue to grow.
Investors should do well with EA
Advances in technology over the past 40 years have propelled major video game titles to massive outperformance over the S&P 500. More immersive gaming experiences and easier access to games, made possible by cloud gaming platforms and mobile devices, are powerful forces that are expected to push EA’s share price to new heights. long-term.
Plus, stocks aren’t that expensive right now, trading at a price / free cash flow multiple of 21. At this level, it seems like now is a good time to buy one of the biggest names. of the gaming industry.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.