About Electronic Arts

When I was a lot younger, I loved playing video games. 

One Christmas morning, I ran into the living room and was promptly greeted with a PlayStation 3 (PS3). But what’s a brand new, state of the art video game console without the most essential video games?

I was gifted one of those too.

FIFA 14.

Sleepovers with my classmates in middle school were never the same.

FIFA in this particular context is the series of soccer video games developed by none other than Electronic Arts.

However, the buck doesn’t stop with FIFA.

Electronic Arts, commonly referred to simply as EA, is also home to the Madden franchise, NHL, Battlefield and many other well-known video games. 

As you probably guessed, EA makes most of its money through the sale of video games along with other digital mobile games, however the company also generates revenue through gaming subscription packages, which I’ll be discussing later.

Since I tie a lot of sentimental value to this company, this is one of the ultimate tests of being an objective, logical and rational investor and deploying capital based on numbers, not feelings.

Putting fun sleepover memories to the side, let’s figure out whether or not EA’s stock is worth investing in for the long run.

Electronic Arts’ stock financials

The company currently has a market capitalization of $34.7 billion, a price-to-earnings (P/E) ratio of 40.21 and distributes an annual dividend of $0.76 to its shareholders.

From a numbers standpoint, this isn’t the best start.

As we’ve discussed in previous articles, it is generally accepted that a price-to-earnings (P/E) ratio of 20 is considered to indicate that a stock is trading at fair value or what it’s worth. Correspondingly, a P/E ratio above 20 indicates that a stock’s overvalued. Given this information, it appears as though Electronic Arts’ stock is considerably overvalued at the moment, trading at just about double what it’s actually worth.

Let’s venture out into the balance sheet and see how financially stable EA is.

The company currently holds around $13.8 billion in total assets and approximately $6.1 billion in total liabilities. 

This is pretty much the most basic balance sheet structure ever.

But basic tends to be good, at least from my vantage point and here there’s no exception.

I’m satisfied with the company’s total assets outweighing its total liabilities by a wide margin, especially after the cost headwinds that have been induced by COVID-19 and tied with the fact that the gaming market as a whole seems to be shifting away from consoles and more towards computer or online-oriented gaming.

However, revenue is likely a better indicator of how successfully (or not) the company is adapting to the changing gaming business landscape. 

Speaking of revenue, EA’s total revenue has been consistent over the last five years, generally planted between $5 billion and $7 billion. While I was initially worried about EA’s revenue dropping off during the heap of the pandemic, it appears as though the company is adapting to the changing landscape and still able to meet its customers (and new customers) and generate consistent sales.

This makes me a happy prospective investor.

As it relates to the company’s cash flow statement, EA’s net income over the past five years has remained positive and has ranged from $789 million up to roughly $3 billion.

No complaints here.

Electronic Arts’ stock fundamentals

I made an assumption about the company’s trailing twelve month (TTM) net profit margin.

While I initially assumed that EA’s net profit margin would be at or below the industry’s average, I was pleasantly surprised to find that the company’s net profit margin stands at 12.43% in comparison to the industry’s average of 4.89%, according to TD Ameritrade’s platform.

I’d assume that one of the main ways in which EA increased its net profit margin over time is through its relatively new subscription business(es) along with the company’s large amount of market share. I tend to like businesses with supplemental subscription businesses since they usually are able to yield more revenue (and hopefully profit) through already existing product offerings that are just packaged differently.

It seems that EA has seen a lot of success in its subscription segment so far and as long as they continue to stay ahead and offer more of these services to its customer base, the future looks bright for the company in this regard.

On the basis of returns, EA’s TTM returns on equity, assets and investment are all currently higher than the industry averages, which is also impressive and something I wasn’t expecting.

As previously alluded to, if EA continues to sharpen and expand its subscription offerings as well as further develop the graphics and offerings within its game franchises and possibly look into acquiring complimentary yet focused franchises that it can add to its arsenal, that would be quite ideal and likely set the company up for future success.

A quick side note on acquisitions.

Given that EA already has a strong portfolio concentration of sports games, they might consider looking into shelling out a few billion dollars (given that their current financials are strong) in acquiring one of their rival’s, Take-Two Interactive, premier sports games franchises, 2K.

While certain regulatory agencies such as the Federal Trade Commission (FTC) and Department of Justice (DOJ) might thwart EA’s theoretical efforts in acquiring the 2K franchise from Take-Two, as it can be argued that it could give EA too much power in the sports games space, it might be worth exploring as it would bring aboard another iconic game franchise that could help EA stay ahead of the competition.

Should you buy Electronic Arts’ stock?

Prior to drafting this stock analysis article I predicted EA’s financials and fundamentals to be mediocre or even subpar. 

I was gravely mistaken and I’m glad I did some necessary due diligence.

Although there are some very solid metrics and past and current strategic tailwinds backing this company, I think EA’s stock price is overvalued and not worth paying a premium for, given that it’s been a mature company in gaming for years and isn’t growing at a fast enough rate to justify paying for excessive growth that just isn’t there.

Given all of this information, I give Electronic Arts’ stock a “hold” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.