Stock of the Day

February 6, 2023

Electronic Arts (EA)

$130.93
+$0.94 (+0.7%)
Market Cap: $33.88B

About Electronic Arts

Electronic Arts Inc. develops, markets, publishes, and distributes games, content, and services for game consoles, PCs, mobile phones, and tablets worldwide. It develops and publishes games and services across various genres, such as sports, racing, first-person shooter, action, role-playing, and simulation primarily under the Battlefield, The Sims, Apex Legends, Need for Speed, and license games from others, including FIFA, Madden NFL, UFC, and Star Wars brands. The company licenses its games to third parties to distribute and host its games. It markets and sells its games and services through digital distribution and retail channels, as well as directly to mass market retailers, specialty stores, and distribution arrangements. Electronic Arts Inc. was incorporated in 1982 and is headquartered in Redwood City, California.

Electronic Arts Bull Case

Here are some ways that investors could benefit from investing in Electronic Arts Inc.:

  • The current stock price is $131.17, which is significantly lower than its 12-month high of $168.50, potentially offering a buying opportunity for investors looking for value.
  • Electronic Arts Inc. has a strong market capitalization of approximately $34.19 billion, indicating a solid position in the gaming industry and the ability to invest in new projects and technologies.
  • The company reported a net margin of 14.28%, showcasing its ability to convert revenue into profit effectively, which is a positive indicator of financial health.
  • With a P/E ratio of 33.38, Electronic Arts Inc. is positioned competitively within the gaming sector, suggesting that investors are willing to pay a premium for its earnings, reflecting confidence in future growth.
  • The recent quarterly dividend of $0.19 per share, with an annualized yield of 0.59%, provides a return on investment for shareholders, which can be attractive for income-focused investors.

Electronic Arts Bear Case

Investors should be bearish about investing in Electronic Arts Inc. for these reasons:

  • The company missed analysts' consensus EPS estimates by $1.07 in its latest earnings report, which may raise concerns about its short-term profitability and operational efficiency.
  • Electronic Arts Inc. has a relatively high P/E ratio compared to some competitors, which could indicate that the stock is overvalued, posing a risk if earnings do not meet expectations.
  • Insider selling activity has been noted, with executives reducing their positions, which can sometimes signal a lack of confidence in the company's future performance.
  • Analysts have mixed ratings on the stock, with a consensus rating of "Hold," suggesting uncertainty about its future price movements and potential for growth.
  • The company's debt-to-equity ratio of 0.25, while relatively low, indicates that it is using some leverage, which could be a concern if market conditions change or if interest rates rise.

Is Electronic Arts Setting the Bar Too Low?

Written By Jea Yu on 2/6/2023

Is Electronic Arts Setting the Bar Too Low?

Video game publisher Electronics Arts (NYSE: EA) stock has been chopping in a 20-point weekly rectangle trading range since August 2022. While the Company was able to expand its player network during the COVID pandemic, its revenue and earnings growth also peaked during the height of the lockdown mandates.

The Company has been experiencing normalization, as evidenced by the continued booking decline. Electronic Arts severely lowered its fiscal Q4 2023 top and bottom line guidance as it pushed back the release of Star Wars Jedi: Survivor to fiscal Q1 2024.

While the game is still coming out, it will release on April 28, 2023. This means its Q1 2024 may reflect a jump from the release. Unfortunately, this did little to calm investors as shares collapsed (-12%) afterward.

Macroeconomic headwinds continue to hurt sales and net bookings, which has been a running theme among video game publishers like Microsoft Co. (NASDAQ: MSFT), Roblox Co. (NASDAQ: RBLX), and Sony Co. (NYSE: SNE) heading into 2023.

Out with FIFA, In with EA Sports FC

Electronic Arts stated that EA Sports FIFA 2023 is on pace to be the biggest title in franchise history, delivering record engagement in fiscal Q3 2023. However, they have parted ways with FIFA selling over 325 million copies in nearly three decades under the FIFA license.

Electronic Arts will not be paying licensing fees to FIFA anymore after FIFA 2023, nor will it have rights to the World Cup. It will rebrand its franchise under the name EA Sports FC.

FIFA will be seeking to auction its license among video game publishers. EA Sports FC (Futbol Club) will start its independent franchise with FC 2024, featuring over 19,000 players, 700 teams, 100 stadiums, and 30 leagues which have all been licensed.

EA Sports FC has exclusive rights to the Premium League, Serie A, LaLiga, Bundesliga, and MLS. This move away from FIFA is expected to save EA over $150 million in licensing fees.

Softness Abounds

On Jan. 31, 2023, Electronic Arts released its fiscal third-quarter 2023 results for December 2022. The Company reported an earnings-per-share (EPS) profit of $0.73, beating analyst estimates of $0.50 by $0.23. Revenues fell (-9.1%) year-over-year (YoY) to $2.34 billion, falling short of the $2.5 billion consensus analyst estimates.

Net bookings fell (-1%) YoY to $7.146 billion for the trailing twelve months. Live services and other net bookings rose 4% YoY, comprising 75% of total net bookings. The EA player network grew to over 650 million in the quarter.

Electronic Arts CEO Andrew Wilson commented, “While our teams delivered for our players, the current macro environment impacted Q3 results. As we navigate the short term, we're focused on building for the long term and remain confident about our future. With amazing talent, proven IP, and growing player network, EA is operating from a position of strength."

Severely Lower Guidance

Electronic Arts cut its Q4 fiscal 2023 EPS to $0.05 to $0.20 versus $0.74 consensus analyst estimates. Revenues are expected between $1.675 billion to $1.775 billion versus $2.24 billion consensus analyst estimates. This sent shockwaves as shares tumbled (-15%) on the guidance.

The drop in guidance was due to the delay of its highly anticipated Star Wars Jedi: Survivor games pushed until April 28, 2023, which falls into the fiscal Q1 2024 quarter. It is also ending development early for two of its mobile gaming titles reflecting softness in mobile gaming as indicated by Take-Two Interactive Software Inc. (NASDAQ: TTWO) in its prior quarter.

Analysts Reactions

Bank of America cut its rating on EA stock to Neutral from Buy with a price target of $130. Jeffries left their Buy rating unchanged but noted that the rare miss is a sign that Electronic Arts is also starting to succumb to industry headwinds. Analyst Andrew Uerkwitz commented, "Game delays, increasing game complexity, uncertain consumer behavior, and general macro [economic issues] have been wreaking havoc on the video game industry.”

Is Electronic Arts Setting the Bar Too Low?

Weekly Rectangle Breakdown Attempt

The weekly candlestick chart on EA shows a rectangle trading range on the verge of a breakdown after its earnings reaction on heavy volume. The rectangle formed in August as shares sold off from $133.40 to a swing low near $113.92.

As the weekly stochastic bounced back up through the 20-band, shares could accelerate higher after triggering the weekly market structure low (MSL) breakout above $124.79. Shares retested $133.40 by November 2022 before triggering a weekly market structure high (MSH) selloff on the breakdown below $129.85.

The weekly MSH held firm resistance on the pre-earnings run-up before shares collapsed on the release. The weekly 20-period exponential moving average (EMA) resistance falls again at $124.84, followed by the weekly 50-period MA resistance at $126.30. The weekly stochastic forms a divergence top again as each stochastic crossover down forms at a sequentially lower band.

This is foreshadowing a breakdown of the weekly rectangle range. Pullback supports in the event of a breakdown are at a $109.24 swing low, $106.70, $102.39, $99.63, and $96.70.

Recent News