Here’s Why This Cloud Computing Company Is A Better Pick Over Electronic Arts Stock

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We believe that ServiceNow stock (NYSE: NOW) currently is a better pick over Electronic Arts stock (NASDAQ: EA), given its better prospects. Although ServiceNow is trading at a comparatively higher valuation of 11.6x trailing revenues vs. 4.7x for Electronic Arts, this gap in valuation makes sense to some extent, given ServiceNow’s superior revenue growth and lower financial risk, as discussed below. We compare these two companies due to their similar revenue base.

Looking at stock returns, Electronic Arts, with -5% returns this year, has fared better than ServiceNow, down 36%, and the broader markets, with the S&P 500 index 16% lower. There is more to the comparison, and in the sections below, we discuss why we believe NOW 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, in an interactive dashboard analysis of Electronic Arts vs. ServiceNowWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. ServiceNow’s Revenue Growth Is Better

  • Both companies posted double-digit sales growth over the recent quarters. Still, ServiceNow’s revenue growth of 25.1% is better than 13.9% for Electronic Arts.
  • Even if we look at the longer term, ServiceNow has fared better, with its sales rising at an average growth rate of 31.2% to $5.9 billion in 2021, compared to $2.6 billion in 2018, 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’ recent revenue growth has been driven by its live services offering, primarily for the FIFA franchise.
  • Furthermore, the company benefits from its recent acquisitions, including Playdemic, Codemasters, Metalhead Software, and Glu Mobile.
  • ServiceNow provides a cloud-based workflow automation platform, and it has seen its sales rise over the recent years with the addition of new customers, aiding its subscription revenue growth.
  • ServiceNow has more than 1,300 customers with annual billing of over $1 million. With new customer additions and a rise in the annual billing of existing customers, the company is likely to see strong revenue growth over the coming years, in our view.
  • Our Electronic Arts Revenue Comparison and ServiceNow Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, ServiceNow’s revenue growth over the next three years is expected to be better than Electronic Arts. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 4.1% for Electronic Arts, compared to a 17.9% CAGR for ServiceNow, 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 in the 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.
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2. Electronic Arts Is More Profitable But Comes With Higher Risk

  • Electronic Arts’ operating margin of 18.3% over the last twelve-month period is much better than just 3.8% for ServiceNow.
  • This compares with 20.1% and 2.2% figures seen in 2019, before the pandemic, respectively.
  • Electronic Arts’ free cash flow margin of 24.5% is lower than 34.8% for ServiceNow.
  • Our Electronic Arts Operating Income Comparison and ServiceNow Operating Income dashboards have more details.
  • Looking at financial risk, ServiceNow fares better. Its 1.7% debt as a percentage of equity is lower than 5.4% for Electronic Arts, while its 49.3% cash as a percentage of assets is higher than 14.3% for the latter, implying that ServiceNow has a better debt position and has more cash cushion.

3. The Net of It All

  • We see that ServiceNow’s revenue growth is better and has a better debt position and more cash cushion. On the other hand, Electronic Arts is available at a comparatively lower valuation and is more profitable.
  • Now, looking at prospects using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe ServiceNow is currently the better choice of the two. The table below summarizes our revenue and return expectations for EA and NOW over the next three years and points to an expected return of 72% for ServiceNow over this period vs. a 19% expected return for Electronic Arts stock, implying that investors are better off buying NOW over EA, based on Trefis Machine Learning analysis – Electronic Arts vs. ServiceNow – which also provides more details on how we arrive at these numbers.

While NOW 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 Dec 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
EA Return -5% -5% 58%
NOW Return 1% -36% 463%
S&P 500 Return -2% -16% 78%
Trefis Multi-Strategy Portfolio -1% -18% 230%

[1] Month-to-date and year-to-date as of 12/15/2022
[2] Cumulative total returns since the end of 2016

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