Is There A Better Pick Over Electronic Arts Stock?

EA: Electronic Arts logo
Electronic Arts

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 of 9.5x trailing revenues vs. 4.7x for EA stock. This gap in valuation makes sense given Microsoft’s superior revenue growth over recent years, better profitability, and lower financial risk, as discussed below.

Although both 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, Electronic Arts, with -5% returns this year, has fared better than Microsoft, down 24%, and the broader markets, with the S&P 500 index 18% lower. While both companies will likely see top-line expansion over the coming years, Microsoft is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe MSFT stock will offer better returns than EA stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Electronic Arts vs. MicrosoftWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

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1. Microsoft’s Revenue Growth Has Been Stronger

  • Both companies managed to see strong sales growth over the recent quarters. Still, Electronic Arts revenue growth of 26% is better than 18% for Microsoft.
  • However, looking at the longer term, Microsoft’s sales have risen at an average growth rate of 16.4% to $168.1 billion in 2021, while Electronic Arts saw its revenue rise at an average rate of 12.6% to $7.0 billion in fiscal 2022, compared to $5.0 billion in fiscal 2019 (Electronic Arts’ fiscal year ends in March).
  • Electronic Arts has been on an acquisition spree with Playdemic, Codemasters, Metalhead Software, and Glu Mobile acquisitions announced in the recent past. This should bolster its revenue growth going forward.
  • Of late, Microsoft has benefited from robust demand for its cloud offerings, including Azure and productivity and business processes. Its revenue growth is also aided by several acquisitions, including Nuance Communications, Zenimax Media, and GitHub, over recent years.
  • Our Electronic Arts Revenues and Microsoft Revenues dashboards provide more details on the companies’ segments.
  • Looking forward, Microsoft will likely continue to see momentum for its cloud business, and its earlier announced acquisition of gaming company Activision Blizzard will further aid its top-line growth. Activision Blizzard is home to some very popular game franchises, including Call of Duty and Candy Crush.
  • For Electronic Arts, FIFA is the largest game, and with the FIFA World Cup coming up later this year, the company 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 be released over the coming years.
  • Still, looking forward, Microsoft’s revenue is expected to grow faster than Electronic Arts’ over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 4.6% for Electronic Arts, compared to 11.6% CAGR for Microsoft, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

2. Microsoft Is More Profitable With Lower Risk

  • Microsoft’s operating margin of 42.1% over the last twelve-month period is much better than 17.3% for Electronic Arts.
  • This compares with 34.1% and 20.1% figures seen in 2019, before the pandemic, respectively.
  • Even if we look at the recent margin growth, Microsoft stands ahead, with the last twelve months vs. last three-year margin change at 1.8%, compared to -3.0% for Electronic Arts.
  • Electronic Arts’ operating margins over the last few quarters were impacted by increased investments in R&D as well as higher marketing and sales-related expenses.
  • Microsoft’s free cash flow margin of 44.9% is also higher than the 27.3% for Electronic Arts.
  • Our Electronic Arts Operating Income and Microsoft Operating Income dashboards have more details.
  • Looking at financial risk, Microsoft fares better. Its 2.6% debt as a percentage of equity is lower than 5.3% for Electronic Arts, while its 53.6% cash as a percentage of assets is higher than 18.3% for the latter, implying that Microsoft has a better debt position and has more cash cushion.

3. The Net of It All

  • We see that Microsoft’s revenue growth and profitability have been better. It has a better debt position and more cash cushion. On the other hand, Electronic Arts is available at a comparatively lower valuation. Going by historical performance, Microsoft appears to be a better pick.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we still believe Microsoft is currently the better choice of the two. The table below summarizes our revenue and return expectations for EA and MSFT over the next three years and points to an expected return of 33% for Microsoft over this period vs. a 19% expected return for Electronic Arts stock, implying that investors can enter both the stocks for double-digit gains over the next few years. However, if they have to pick one, they will likely be 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 looks like it will offer better growth over EA stock, 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 at how counter-intuitive the stock valuation is for Teradata vs. Crane.

With inflation rising and the Fed raising interest rates, among other factors, Electronic Arts stock has seen a 5% fall 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.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Sep 2022
MTD [1]
YTD [1]
Total [2]
EA Return -1% -5% 59%
MSFT Return -2% -24% 312%
S&P 500 Return -1% -18% 75%
Trefis Multi-Strategy Portfolio -2% -17% 228%

[1] Month-to-date and year-to-date as of 9/6/2022
[2] Cumulative total returns since the end of 2016

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