Will Electronic Arts Stock See Higher Levels?
Electronic Arts stock (NASDAQ: EA) is up 7% in the last two months and looks like it has more room for growth. EA stock has risen from $117 in early February to $125 now. This performance compares with a -0.3% return for the broader S&P500 index. Looking at a slightly longer term, EA stock is up 16% from levels in late 2019. This can be attributed to 1. a 47% rise in Electronic Arts revenue to $7.3 billion, 2. its average shares outstanding falling 8% to 274 million, partly offset by 3. the company’s P/S ratio, which plunged 27% to 4.7x trailing revenues from 6.5x in 2019. Our interactive dashboard, Why Electronic Arts Stock Moved, has more details.
Electronic Arts’ recent revenue growth has been driven by its live services offering, primarily for the FIFA franchise. Furthermore, the company benefits from recent acquisitions, including Playdemic, Codemasters, Metalhead Software, and Glu Mobile. The company benefited from lockdowns during the pandemic, as gamers spent more time on gaming. However, this trend has now cooled off. Looking forward, the company should benefit from the release of Star Wars Jedi: Survivor later this month.
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The company’s latest results (Q3 fiscal 2023) didn’t sit well with the investors, resulting in a price correction from $129 on Jan 31 this year to $112 on Feb 6. Although the company saw continued growth in its live services offerings, Mobile segment revenue was lower than anticipated. The company has decided to shut down mobile versions of its two popular games – Apex Legends and Battlefield. It also cut its full-fiscal 2023 guidance. It now expects sales to be $7.3 and adjusted earnings to be $5.97 at the mid-point of the provided range, reflecting a 5% and 16% cut from its previous guidance, respectively.
While Electronic Arts saw its sales rise a significant 47% since 2019, its operating margin has slightly declined to 18.3% in the last twelve months, vs. 20.1% in 2019. Our Electronic Arts Operating Income Comparison dashboard has more details. Looking at valuation, we find that EA stock has more room for growth. We estimate Electronic Arts’ Valuation to be $138 per share, about 10% above the current market price. At its current levels, EA stock is trading at 20x forward expected adjusted earnings of $6.10 (per Trefis analysis), compared to the last three-year average of 22x, implying slight room for growth. Even if we were to look at the P/S multiple, EA stock is trading at 4.7x trailing revenues vs. its five-year average of 5.7x. Our Electronic Arts (EA) Valuation Ratios Comparison has more details.
While EA stock looks like it can see higher levels, 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 Vicor vs. Williams Sonoma.
Despite higher inflation and the Fed raising interest rates, EA stock has risen 2% in the last twelve months. Can it drop from here? 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.
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|S&P 500 Return||0%||7%||83%|
|Trefis Multi-Strategy Portfolio||-2%||6%||232%|
 Month-to-date and year-to-date as of 4/10/2023
 Cumulative total returns since the end of 2016
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