Electronic Arts, aka EA (EA - Free Report) , is unquestionably ‘in the game’ during this global pandemic. Casual and dedicated gamers alike are glued to their screens across the globe, providing a rare tailwind to this video game powerhouse. Analysts have been increasing their EPS estimates for the next few years, pushing EA into a Zacks Rank #1 (Strong Buy).
EA has been a dominant player in video game development since the inception of modern video games in the 80s. EA is best known for its iconic life simulation game The Sims, as well as its lineup of leading sports games like FIFA, Madden, and NHL, which are released annually. The firm has a broad portfolio of world-renown video games that continue to drive its topline.
EA and its innovative management team have been successful in transitioning from physical video games to a digitally-driven & subscription-service model. EA still relies on new video game releases for revenue growth, but EA’s live services now makeup over 50% of the company’s sales and are expected to be a primary topline driver moving forward. These live services include subscription services that allow gamers to play a select catalog of games for a monthly fee as well as esports.
EA is a major player in esports, a new digitally competitive ‘sport’ where gaming enthusiasts can watch their favorite gamers compete in the video games that they know and love. According to Influencer Marketing Hub, this fast-growing industry is expected to be worth $1.65 billion by next year, with a compounded annual growth rate of over 27%. EA is well-positioned to corner a sizable portion of this market with its essential esports games: Apex Legends, FIFA, Madden NFL, as well as globally sponsored events & competitions.
The stay-at-home initiative is conditioning our society to rely on digital entertainment like video games for a daily release. I suspect that this uptick in gaming will continue into the post-pandemic world.
We are on the verge of a new wave of mobile gaming, which will be driven by cloud technology. 5G is going to be the primary catalyst that makes this form of gaming possible, with its hyper-fast connectivity. EA is partnering with Google Stadia (GOOGL - Free Report) to make its games available through Stadia’s cloud platform. I suspect that EA will be partnering with more cloud gaming innovators like Microsoft (MSFT - Free Report) and Nvidia (NVDA - Free Report) as high-quality mobile gaming gains traction.
Societies’ new normal will be playing more video games, and the next generation of gaming consoles that are anticipated to be released in the 2020 holiday season gives me even more cause to be bullish on EA long-term potential.
EA has a volatile top and bottom line that tend to be cyclically correlated to game releases, but the rise of its live services segment should curb some of the volatility into consistent growth. EA Sports’ annual versions of FIFA, Madden, and NHL provide some reliability in sales figures each year, but the yearly improvements are becoming increasingly marginal.
This enterprise is well-capitalized with $5.6 billion in cash & equivalents, making up more than its total liabilities on the balance sheet. The company has very little debt on the books and robust growing cash flows that are more than enough to finance its innovative operations and attractive investment opportunities.
Tonight’s Earnings Release
EA is releasing its March quarter earnings after close tonight. This should provide us with a clearer picture of how the company has benefited from the increased engagement and whether this pandemic tailwind will continue in the post-pandemic world.
I would be hesitant to put a position on these shares before the quarterly results are released tonight because of the stock’s recent run-up. Investors may be ready to pull profits off the table amid the economic uncertainty.
According to Zacks Consensus estimates, we are looking for an EPS of $0.98 on sales of $1.17 billion, which would represent a YoY decline on both metrics. Focus on management’s discussion of future expectations and investments for clues on where the company is headed. Any direct mention of guidance will likely be the catalyst for any substantial price action if provided.
EA is a robust long-term investment for your portfolio of the future. This company has driven innovation for decades, and I anticipate that it will continue to do so in the years to come. The savvy management team continues to stay ahead of the innovation curve. The next generation of gaming consoles, as well as the rise of esports, should position EA for robust growth in the coming years.
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