Electronic Arts stock (NASDAQ: EA) currently trades at $119 per share, more than 20% below its level in February 2021, and it can see higher levels over time. Electronic Arts is one of the leading gaming companies known for its sports games, including FIFA. EA stock was trading at around $122 in early June 2022, just before the Fed started increasing rates, and is now marginally below that level, compared to 15% gains for the S&P 500 during this period. EA stock has seen a 15% fall in a month due to its downbeat guidance for net bookings in the coming quarters. The company’s revenues have been stable at around $2 billion in recent quarters. There has been a steady decline in the inflation rate in response to the Fed’s aggressive rate hike plan – although investors still have concerns about a potential recession.
Returning to the pre-inflation shock level means that EA stock will have to gain more than 25% from here, and we believe it will materialize over time. We estimate Electronic Arts’ valuation to be around $140 per share, implying over 15% gains. This is because the company should continue seeing robust demand for its sports franchises and new releases, including Madden 24 and NHL 24. Also, the company should continue to expand its gross margin due to the increased adoption of digital downloads that offer higher margins. For perspective, EA’s gross margin has improved from 73% in 2019 to 76% in 2023 (the fiscal ends in March). This trend is expected to continue and bolster EA’s earnings growth.
Interestingly, EA stock had a Sharpe Ratio of 0.2 since early 2017, which is lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
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Our detailed analysis of Electronic Arts’ upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.
2022 Inflation Shock
Timeline of Inflation Shock So Far:
- 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
- Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
- April 2021: Inflation rates cross 4% and increase rapidly.
- Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
- June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
- July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
- Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.
In contrast, here’s how EA stock and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
EA and S&P 500 Performance During 2007-08 Crisis
EA stock declined from nearly $58 in September 2007 (pre-crisis peak) to $16 in March 2009 (as the markets bottomed out), implying it lost over 70% of its pre-crisis value. It recovered slightly post the 2008 crisis to levels of around $18 in early 2010, rising about 8% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.
EA Fundamentals Over Recent Years
Electronic Arts’ revenue rose from $5.5 billion in 2020 to 7.4 billion in 2023 as the Covid-19 outbreak resulted in increased gaming demand as more people stayed indoors, eschewing any public forms of entertainment. The company’s EBITDA margin has also increased from 6.3% in 2020 to 8.9% in 2023. Higher revenues and EBITDA have resulted in bottom-line expansion for Electronic Arts. Its earnings stood at $6.47 on a per share and adjusted basis in 2023, compared to the $4.81 figure in 2020.
Does EA Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?
Electronic Arts’ total debt increased from $397 million in 2020 to $1.9 billion in 2023, while its total cash decreased from around $3.8 billion to $2.8 billion over the same period. The company also garnered $1.6 billion in cash flows from operations. Electronic Arts has a solid cash cushion and is in an excellent position to meet its near-term obligations.
With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe Electronic Arts stock has the potential for solid gains once fears of a potential recession are allayed. That said, the company’s downbeat guidance of $7.3 billion to $7.7 billion in net bookings for 2024 has weighed on its stock recently, and any slowdown in bookings growth remains a risk factor to realizing these gains.
While EA stock may have some room for growth, 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.
|S&P 500 Return||-5%||14%||95%|
|Trefis Multi-Strategy Portfolio||-9%||17%||276%|
 Month-to-date and year-to-date as of 8/18/2023
 Cumulative total returns since the end of 2016
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