This Tech Giant Appears To Be A Better Pick Over Electronic Arts Stock

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We believe that Microsoft stock (NASDAQ: MSFT) currently appears to be an attractive pick over its industry peer Electronic Arts stock (NASDAQ: EA), despite its comparatively higher valuation. MSFT stock trades at 13.4x trailing revenues, compared to 5.7x for EA stock. Although both the companies saw a rise in revenue over the recent quarters, the growth has been better for Microsoft, aided by robust demand for its cloud offerings, including Azure.

Looking at stock returns, MSFT, with 7% returns over the last six months, has outperformed EA, which is down around 1%, and it has also outperformed  the broader markets, with only a 3% rise for the S&P500 index. However, there is more to the comparison, and we believe that Microsoft stands out with higher expected returns compared to Electronic Arts, as we discuss in the sections below.  We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis – Electronic Arts vs MicrosoftWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Microsoft’s Revenue Growth Has Been Stronger

  • Both companies managed to see sales growth over the recent quarters, but Microsoft has witnessed a comparatively faster revenue growth over the recent quarters. Looking at a longer time frame, Microsoft’s sales have jumped from $97 billion in 2017 to $176 billion over the last twelve months, while Electronic Arts revenues have risen from $4.8 billion to $6.4 billion over the same period.
  • Note that Microsoft’s revenue growth is also aided by several acquisitions, including Nuance Communications, Zenimax Media, and GitHub, over the recent years.
  • Electronic Arts has also been on an acquisition spree with Playdemic, Codemasters, Metalhead Software, and Glu Mobile acquisitions announced last year, and this should bolster its revenue growth over the coming quarters.
  • Our Microsoft Revenues and Electronic Arts Revenues dashboards provide more details on the companies’ segments.
  • Now, Microsoft’s revenue growth of 20% over the last twelve month period is better than 14% growth for Electronic Arts, driven by higher demand for its cloud services. Even if were to look at a slightly longer time frame, Microsoft has outperformed Electronic Arts with its last three-year revenue CAGR of 15%, compared to just 3% for Electronic Arts.
  • Looking forward, with the economies opening up, Microsoft will continue to see momentum for its cloud business, and its recently announced acquisition of Activision Blizzard will further aid its top-line growth. Activision Blizzard is home to some of the very popular game franchises, including Call of Duty and Candy Crush.
  • Microsoft’s revenue is expected to continue to grow at a faster pace compared to Electronic Arts. The table below summarizes our revenue expectation for the two companies over the next three years, and points to a CAGR of 10% for Microsoft, compared to a CAGR of just 2% for Electronic Arts, based on Trefis Machine Learning engine.
  • Note that we have different methodologies for companies negatively impacted by Covid, and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively impacted by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate, and beyond the recovery point, we apply average annual growth observed in the three years prior to Covid to simulate return to normal conditions. For companies registering positive revenue growth during Covid, we consider average annual growth prior to Covid with certain weight to growth during Covid and the last twelve months.
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2. Microsoft Is More Profitable With Lower Risk

  • Microsoft’s operating margin of 42% over the last twelve month period is much better than 17% for Electronic Arts.
  • Even if we were to look at the recent margin growth, Microsoft stands ahead, with last twelve month vs last three year margin change at 4.6%, compared to -4.6% for Electronic Arts.
  • Electronic Arts’ operating margins over the last couple of quarters was impacted by increased investments in R&D as well as higher marketing and sales related expenses.
  • It should be noted that Microsoft’s operating margin has been better than Electronics Arts over the last few years. Microsoft’s operating margin rose from levels of 30% in 2017 to 42% currently, while Electronic Arts’ operating margin has declined from 25% to 17% over the same period. Our Microsoft Operating Income and Electronic Arts Operating Income dashboards have more details.
  • Looking at financial risk, Microsoft beats Electronic Arts with its better cash position. Microsoft’s 39% cash as percentage of assets is higher than 15% for Electronic Arts.

3. The Net of It All

  • We see that the revenue growth as well as profitability has been better for Microsoft and it has a better cash cushion compared to Electronic Arts. However, the latter is available at a comparatively lower valuation.
  • Now, looking at future prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Microsoft is currently the better choice of the two. The table below summarizes our revenue and return expectation for MSFT and EA over the next three years, and points to an expected return of 15% for MSFT over this period vs. just 1% expected return for EA stock, implying that investors are better off buying MSFT over EA, based on Trefis Machine Learning analysis – Electronic Arts vs Microsoft – which also provides more details on how we arrive at these numbers.

While MSFT stock may outperform EA, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Cooper vs. Microsoft.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Jan 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
EA Return 5% 5% 76%
MSFT Return -10% -10% 385%
S&P 500 Return -5% -5% 102%
Trefis MS Portfolio Return -10% -10% 255%

[1] Month-to-date and year-to-date as of 1/21/2022
[2] Cumulative total returns since the end of 2016

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