A Look At Our $105 Price Estimate For Electronic Arts

by Trefis Team
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Electronic Arts
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The growth in the Services segment, primarily led by in-game offerings, is the key factor that will drive Electronic Arts’ (NASDAQ:EA) future earnings growth. The company continues to see strong revenue growth in the Services segment, which is benefiting from live service offerings, such as Ultimate Team, and continued growth in its popular franchises, including FIFA. This trend will likely continue in the near term, as the company expands its live services offerings to other franchises. We have created an interactive dashboard ~ Our $105 Price Estimate For Electronic Arts ~ on the company’s expected performance in fiscal 2019. You can adjust various drivers to see the impact on the company’s overall earnings, and price estimate.

Expect Services Revenue To See Strong Growth In The Near Term

We forecast the Products segment revenues to decline in the coming years. While the segment revenues have hovered around $2.5 billion over the last four years, we forecast them to decline towards to under $2 billion by the end of fiscal 2020. This can partly be attributed to rising popularity of lower price point casual and mobile games, and the company’s focus on expanding its Services business. In Q2 FY19, the company saw a low double digit decline in segment revenues operationally, primarily from Battlefield 1 and Mass Effect: Andromeda. The company will release Battlefield V on November 20, which should boost the Q4 FY19 segment revenues.

Looking at the Services segment, we forecast the revenues to grow in low 20s percent to $3.1 billion in fiscal 2019. The segment is benefiting from the growth in the FIFA franchise, especially its live services, such as Ultimate Team, which has been a big success for Electronic Arts, allowing the company to earn from matchmaking services. In fact, Ultimate Team accounts for 50% of the company’s live services revenues. The segment reported revenues were up 40% in Q2 FY19, reflecting the change in accounting standard. Operationally, the segment revenues were up in high single digits, benefiting from FIFA Ultimate Team and Madden Ultimate Team. The Services segment will likely continue to see strong growth in the coming years, as the company continues to expand its live service offerings into new gaming genres. Ultimate Team was successful for its FIFA franchise, and the same is being expanded to other games, such as NFL, and NHL. In addition, the company’s focus on the China market will aid the segment revenue growth in the coming years.

Our Price Estimate of $105 For Electronics Arts

Overall, we believe that the expansion of live services will be the key growth driver for Electronic Arts in the near term. We currently estimate the company’s overall revenues to be $5.20 billion in fiscal 2019, of which 60% can be attributed to Services, and Products making up for the rest. We forecast the adjusted EPS to be $4.64 in fiscal 2019, and a TTM price to earnings multiple of 22.5x, to arrive at our price estimate of $105 for Electronic Arts, which is at a premium of 20% to the current market price.

 

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