The Shifting Sands of Electronic Arts

Electronic Arts Stock (NYSE: EA) has been navigating choppy waters, trading around $130, mirroring late 2021 levels. This contrasts with the S&P 500, which has seen a modest 10% uptick over a similar span. The stock’s P/S ratio has plummeted by 33% to 4.6x presently, down from 7x in 2021. This dip in valuation comes against a backdrop of tepid consumer spending, stunting game bookings growth. Rising expenses and fierce industry competition have only soured the pot further, leading to recent layoffs across major gaming entities.

Trials and Triumphs of EA Stock

Despite its struggles, EA stock has not stagnated uniformly. Annual returns have been a mixed bag, with -8% in 2021, -7% in 2022, and a silver lining of 12% in 2023. This stands in stark contrast to the S&P 500, showing returns of 27% in 2021, -19% in 2022, and 24% in 2023. It’s clear that EA found itself in the underperformers’ corner against the S&P in 2021 and 2023.

Learning from the Best

Beating the S&P 500 consistently, whether in feast or famine, has proven elusive for many individual stocks in recent years. Even industry giants like GOOG, META, NFLX, TSLA, MSFT, and AMZN have felt the same struggle. In contrast, the Trefis High Quality (HQ) Portfolio, comprising 30 stocks, has managed to outshine the S&P 500 every year during the same period. What sets them apart? The HQ Portfolio entails better returns with less risk, offering a smoother ride, as evidenced by HQ Portfolio metrics.

Riding the Storm

Amidst an uncertain macroeconomic landscape rife with soaring oil prices and elevated interest rates, one can’t help but wonder if EA will, once again, find itself trailing the S&P over the next year. Will a resurgence be in the offing? Signs point to EA stock scaling new heights over time.

Charting EA’s Trajectory

Electronic Arts’ revenue has surged to $7.7 billion over the last twelve months, marking a 38% jump from $5.5 billion in 2020. The rise owes much to a sustained uptick in live services and robust demand for E-Sports staples like FIFA and Madden NFL. Recent acquisitions, including Playdemic, Codemasters, Metalhead Software, and Glu Mobile in 2021, have also bolstered the coffers. However, a sluggish bookings growth trend has emerged in the wake of a subdued consumer spending climate, with Take Two Interactive and Activision Blizzard (now under Microsoft’s wing) tightening the competitive grip.

Forecasting the Upswing

Despite the headwinds, EA’s operating margin has receded by 565 bps to 20.5% from 26.2% in 2020. Through aggressive share buybacks exceeding $3 billion, total shares outstanding have dipped by 9%. This has fueled earnings growth, with EPS climbing from $4.81 in 2020 to $6.47 in 2023 on a per-share and adjusted basis. Looking ahead, EA anticipates revenue and bookings between $7.3 billion and $7.7 billion in 2024, with adjusted EPS poised to fall within the $6.80 to $7.30 range.

The Crystal Ball: EA’s Valuation

Our crystal ball pegs Electronic Arts’ Valuation at $151 per share, heralding a 14% upswing from its current perch around $132. This prediction leans on a slightly over 21x P/E multiple for EA and anticipated earnings of $7.11 per share on an adjusted basis for the full fiscal 2024, with the P/E ratio aligning closely with the stock’s four-year average.

Paving The Way Forward

As EA stock charts its course toward loftier summits, exploring how Electronic Arts’ Peers fare on pivotal metrics becomes indispensable. Peer comparisons across industries provide invaluable insights that can help investors navigate the winding road ahead.

[1] Returns as of 3/21/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.