Electronic Arts (NASDAQ:EA) has had a good run over the last few years led by continued growth in its FIFA franchises, among others. We expect the company to post a high single digit growth in the top line, and a low double digit growth in the bottom line in the fiscal year ending March 2019. This growth will likely be led by continued uptick in FIFA franchises. Note that the World Cup is just around the corner, and the FIFA video game has already hit No. 1 chart in the U.K. However, it appears that the market may have already priced in the near term growth for Electronic Arts. We have created an interactive dashboard analysis using Trefis’ interactive technology which suggests a fair price of $123 for the company. You can modify inputs such as price to earnings multiple and fundamentals determining Electronic Arts’ price estimate, based on fiscal year 2019 earnings.
Expect Services To Account For Higher Proportion of Revenues Going Forward
The company reports its business results under two segments – (1) Products which include digital or physical sale of games and additional content, and (2) Services – which includes recurring revenue sources such as subscription-based model and in-game transactions. The margins of the latter segment are higher, and the company has been increasingly focusing on expanding the Services model. All things equal, a higher percentage of services in the revenue mix will imply stock price appreciation. We expect this to be the trend going forward. In fact, revenue from Electronic Arts services accounted for just 11% of the company’s total revenue in fiscal 2011, and the same increased to 50% in fiscal 2018. We expect this proportion to further increase to a little under 60% by the end of our forecast period in fiscal 2025.
This growth in services business can be attributed to its Ultimate Team. FIFA Ultimate Team has been a big success for Electronic Arts, allowing the company to earn from matchmaking services. The company has launched similar Ultimate Team services for other sports games such as Madden NFL. It should be noted that Ultimate Team services accounted for 21% of the company’s overall revenues in fiscal 2018, of which FIFA accounted for a big chunk. Moreover, the company is reaping profits from the digital content of other titles, such as Titanfall, and Battlefield, as well.
Looking at the Products segment, we expect the revenues to grow at a slower pace, as compared to the Services segment. We forecast the segment revenues to grow in mid-single-digits in fiscal 2019 to $2.72 billion. Within Products, FIFA remains the company’s most popular offering, accounting for nearly half of the overall units sold. Electronic Arts has an exclusive licensing agreement with the sport’s governing body, FIFA, which has allowed it to maintain a near monopoly in the soccer video game domain. Similarly, the company has an exclusive licensing agreement with the NFL, and its Madden was one of the highest-selling sports game in the U.S. in 2017. Such affiliations are giving Electronic Arts a stability in an otherwise volatile business, where trends and popular games change quickly.
Our $123 price estimate for Electronic Arts is based on $4.90 expected adjusted EPS in fiscal 2019, and a price to earnings multiple of 25x. Our revenue forecast of $5.5 billion represents year-on-year growth of around 7%. Of the total expected revenue in 2018, we estimate $2.8 billion in the company’s Services segment, and Products segment making up for the rest. Our price estimate is 13% below the current market price.
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