How Will Electronic Arts Stock Perform In The New Fiscal Year?

  • EA owns some of the world’s most popular video game franchises and comes with a strong record.
  • A string of major product launches, including continued success of Star Wars, will lift its revenues and earnings this year.
  • The increasing focus on digital offering and the release of Battlefront before the holidays could positively impact margins.

Electronic Arts Inc. (NASDAQ:EA), one of the world’s biggest developers of video games, has started its new fiscal year this month (April). Its shares have fallen by roughly 8% on a year-to-date basis, due in large part to the sell-off that was triggered after the company issued its fourth quarter guidance in January that came in below Wall Street’s estimates. But the company is poised to deliver an impressive performance this year.

EA not only owns some of the world’s most popular video game franchises, such as FIFA, Battlefield and Madden, but also comes with a strong record of delivering better than expected results. According to data from Thomson Reuters, the company has beaten analysts’ consensus earnings and revenue estimates for the last five quarters in a row.

On top of this, EA has been consistently growing revenues, profits, cash flows and margins since FY-2013. It is now expecting a profit of $3.04 per share for the previous fiscal year which ended last month, which is actually higher than its prior estimate of $3 per share, from net revenues of $4.5 billion. That is significantly higher than the profit and revenues of $0.84 per share and $3.79 billion, respectively, in FY-2013. Meanwhile, operating cash flows and margins are projected to come in at $1.2 billion and 71.2%, that shows a growth from $324 million and 65.9% three years ago. And it will likely continue going this way.

The above-mentioned growth has come largely on the back of EA’s ability to launch blockbuster titles every year. Last year, for instance, it released Fifa-16, Madden-16, NBA Live-16, NHL-16, Need for Speed, Plants vs. Zombies (Garden Warfare 2), Unravel and Star Wars Battlefront. Sales of Star Wars, in particular, came in significantly higher than anyone anticipated. Earlier in January, EA said that it has already achieved its target of selling 13 million units of the new Star Wars game more than three months ahead of schedule. The strong sales numbers could allow EA to post better than expected results in the fourth quarter. The company will likely release its fourth quarter results on May 10.

But more importantly, the Star Wars Battlefront experience positions EA to explore additional monetization of this popular franchise in the current fiscal year. The company could become one of the biggest beneficiaries of Walt Disney's (NYSE:DIS) reboot of Star Wars movies with the release of Star Wars Episode VII – The Force Awakens last year, which will be followed by Star Wars Rogue One which will likely hit theaters at the end of this year.

This could further complement EA’s strong line-up of major product launches for FY-2017 (current year). This includes the Mirror’s Edge Catalyst, a reboot of 2008’s popular action adventure title Mirror Edge, which will be released on May 24, a number of sports titles most likely in the second fiscal quarter, a new Battlefield game expected to be released before the holidays, Titanfall 2 also expected in the second half of the current fiscal year followed by Mass Effect: Andromeda possibly in the first three months of 2017. These product releases should continue to support strong revenue and EPS growth.

Meanwhile, EA is going through a major transformation by increasing its focus on digital offerings which includes downloadable PC/console and mobile/tablet games, as opposed to disc-based products. The company expects to earn almost 55% of last fiscal year’s net revenues from digital products, a significant growth from four years ago when digital products contributed just 29% to the revenue mix. The transition is happening just at the right time as the broader videogame industry is also witnessing growth in digital offerings.

There are several advantages of the digital expansion, such as effective distribution and significantly higher user engagement, but the biggest of them all is that the digital business comes with higher margins. The growth of the digital business has played a crucial role in fueling the margin expansion mentioned earlier and this will continue in the current fiscal year, particularly with the release of Battlefront which is tilted more towards the hardcore PC audience.

Bottom-line

EA’s shares are currently hovering near $62, priced 20-times FY-2016 earnings and 17.5-times FY-2017 earnings estimates, according to consensus data from Thomson Reuters. I believe the shares are attractively valued, considering its last 10-year median multiple of 22-times earnings. With revenue and EPS growth through new product releases and gross margin expansion on the back of the ongoing physical-to-digital shift, EA stock is poised to rise in the coming months. The weakness, therefore, could be a buying opportunity.

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