After an 8% fall year-to-date, at the current levels we believe Electronic Arts stock (NYSE: EA) looks undervalued. EA stock fell from around $135 in early January to under $125 now. The YTD 8% fall for EA is much better than the -20% returns for the broader S&P500 index.
Looking at the longer term, EA stock is up 58% from levels seen in late 2018. This marks an underperformance compared to some of its peers, with Microsoft stock rising over 2.5x and Activision Blizzard stock up 67%. The S&P500 index rose 55% over this period.
This 58% rise for EA stock since late 2018 was driven by: 1. Electronic Arts revenue, which grew 41% to $7.0 billion over the last twelve months, compared to $5.0 billion in 2018, 2. the company’s P/S ratio, which rose 14% to 5.1x trailing revenues, from 4.5x in 2018, and 3. a 6% fall in its total shares outstanding to 285 million currently. This means the company’s revenue per share rose a solid 50% to $24.55 now, compared to $16.32 in 2018. Our interactive dashboard, Why Electronic Arts Stock Moved, has more details.
Electronic Arts, in-line with other gaming companies, benefited from a rise in user engagement levels during the pandemic due to the shelter-in-place restrictions, which resulted in people eschewing more public forms of entertainment. The company saw a higher contribution from its live services offerings for its games. FIFA and Apex Legends continue to see strong demand for the company. This trend is expected to continue going forward, as well. FIFA is the largest game for the company, and with the FIFA World Cup coming up later this year, Electronic Arts will likely see strong demand for its FIFA games over the coming quarters. The company has a robust pipeline with more sports games scheduled to release over the coming years.
Electronic Arts has been on an acquisition spree with Playdemic, Codemasters, Metalhead Software, and Glu Mobile acquisitions announced last year. This should bolster its revenue growth over the coming years. That said, Electronic Arts is not alone in eyeing other players, the gaming industry is seeing some consolidation with Microsoft in the process of acquiring Activision Blizzard, the company behind the Call of Duty franchise, and Take-Two Interactive buying mobile gaming company Zynga. There’s also rising competition from metaverse mobile gaming company, Roblox.
Electronic Arts has a debt of just $2 billion, while its cash in hand is over $3 billion. It expanded its adjusted net margins to 29% in fiscal 2022 vs. 26% in 2018. It also spent $5 billion in share repurchases between 2018 and 2022, resulting in a 6% fall in its shares. Overall, the company appears to be on a solid growth trajectory with expanding margins and sound financials.
Although Electronic Arts appears to have strong prospects, it faces headwinds from the current weakness in broader markets. The S&P500 has now entered the bear market territory with rising concerns of slowing economic growth given the high inflation, Fed action, and supply chain disruptions. These factors may impact EA stock performance, as well.
However, we find the EA stock undervalued currently and estimate Electronic Arts’ valuation to be $155 per share, reflecting a 25% upside from its current market price of $124, implying that investors are likely to be better off buying EA stock in the recent dip for solid gains in the long-term. At its current levels, EA stock is trading at just 17x forward adjusted earnings, compared to the last three-year average of 22x, making the stock attractive from a valuation point of view.
While EA stock looks undervalued, it is helpful to see how Electronic Arts’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, 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 Activision Blizzard vs. Gilead Sciences.
With inflation rising and the Fed raising interest rates, among other factors, Electronic Arts stock has fallen 8% this year. Can it drop more? See how low Electronic Arts stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||2%||-19%||72%|
|Trefis Multi-Strategy Portfolio||4%||-22%||211%|
 Month-to-date and year-to-date as of 7/7/2022
 Cumulative total returns since the end of 2016