If It’s In The Game, It’s In The Game

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Last Friday was a brutal day for stocks, as the Dow Jones dropped by more than 1,000 points. Even worse, The Nasdaq dropped nearly 4%. 

However, not all Nasdaq stocks declined that day. Electronic Arts (EA) was up 3.5%. 

The catalyst was a rumor that Amazon (AMZN) was in talks to buy out the company. While some have denied the rumor, it has investors thinking, is EA a takeover candidate?

While the company typically doesn’t garner much attention, search volume amongst financial pros skyrocketed, sending this video game maker into the top five video game stock searches.

The gaming industry is expected to reach $321 billion by 2026, making it one of the hottest growth sectors. Not to mention, Microsoft (MSFT) announced it will be buying Activision Blizzard (ATVI). 

But are rumors enough to justify an investment in EA?

Check out our analysis below…

Electronic Arts Business

Electronic Arts (EA) develops, markets, publishes, and distributes video games. Its games are played on consoles, PCs, mobile phones, and tablets. 

Its popular games include Apex Legends, FIFA, F1, The Sims, and Madden NFL. The games are marketed and sold via digital and retail channels. 

The EA player network grew to nearly 600 million, according to the company’s Q1 FY23 results. The firm generated $1.7 billion during the quarter, largely due to the success of its FIFA franchise and the F1 22 launch. Its FIFA Ultimate Team engagement during the quarter was up nearly 40% (YoY) in weekly and daily average players. 

EA’s bookings were $7.4 billion (ttm), up 22% (YoY), per its Q1 FY23 report.

Financials

EA has increased its revenues for the last four years. The pandemic certainly helped as overall video games sales jumped with folk stuck at home. That’s put the company on pace for record revenue numbers. 

Currently, the trailing twelve month (ttm) revenues are $7.2 billion. Its quarterly revenue growth (YoY) stands at 13.9%. Plus, the firm has an operating cash flow of $1.96 billion (ttm). 

EA has a current ratio of 1.24x, meaning it has enough cash to cover its short-term liabilities. 

The company has rewarded shareholders through its share buyback program, repurchasing 2.5 million shares for $320 million during its last quarter, bringing it to 9.7 million shares for $1.29 billion (ttm). 

Furthermore, it offers a $0.76 per share annual dividend.   

Valuation

2022 has been a difficult year for stocks with high P/E ratios. 

However, at a P/E GAAP (ttm) of 41.8x, EA shares have outperformed the overall market. That could be because the company has been a rumored takeover target. 

Nonetheless, its P/E GAAP is significantly higher than its 5-year average of 33.3x. That’s still better than its competitors Take-Two Interactive (TTWO) at 95.6x, Ubisoft Entertainment (UBSFY) at 61.67x, and (Roblox) RBLX. 

EA has a price-to-sales ratio of 5.18x, which is better than its 5-year average of 6.4x. Additionally, it beats than RBLX at 10.5x and Activision Blizzard (ATVI) at 8.02x. However, it falls short of TTWO at 4.05x and UBSFY at 2.58x. 

Profitability

EA has a gross profit margin of 74.3%, significantly better than RBLX at 23.2% and TTWO at 58.8%.

Its EBITDA margin of 24.4% is better than RBLX at -20.6%, TTWO at 19.8%, and UBSFY at 19.78%. 

EA has a return on equity of 11.6%, which is better than RBLX, TTWO, ATVI, and UBSFY. Its return on total capital of 8.2%, is notably better than its competitors. 

Growth

While Roblox is growing at a faster clip, 57.2% (YoY), it’s not yet a profitable company. 

EAs revenue growth of 25.9% is stronger than TTWO at 13.09%. 

Meanwhile, ATVI and UBSFY has seen a decline in revenue growth (YoY). EA has an EBITDA growth of 53.89%, notably better than RBLX, TTWO, ATVI, and UBSFY. 

Our Opinion 7/10

The gaming industry is hot, and it has a bright future. 

Microsoft announced it was buying Activision. And there have been rumors that Ubisoft might be sold to private equity. 

At the same time, Take-Two bought out Zynga games. 

It’s only natural to believe that EA is a takeover target. 

Will Amazon make a play for them? If it’s not them, it very could be someone else. 

We like EAs current valuation, management’s ability to execute in a difficult economy, and the company’s portfolio of game franchises.