Will Electronic Arts Stock Offer Better Returns Than PPG Industries In The Next Three Years?

EA: Electronic Arts logo
Electronic Arts

We believe Electronic Arts stock (NASDAQ: EA) is a better pick than PPG Industries stock (NYSE: PPG), a paints, coatings, and specialty materials supplier, given its better prospects. Although these companies are from different sectors, we compare them because they have a similar operating income of $1.5 billion to $2.0 billion, similar market capitalization of $31 billion – $33 billion, and both are part of the broader S&P 500 index. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. Since these stocks are from different sectors, comparing P/S against one another may not be helpful. We compare their current multiples with the historical ones in the sections below to better gauge their valuations.

Interestingly, EA and PPG stock have had a Sharpe Ratio of 0.2 since early 2017, 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.

Looking at stock returns, both have underperformed vis-à-vis broader markets amid slowing economic growth. While EA is down 2% this year, PPG is up 4%, and the S&P500 index is up 12%. There is more to the comparison, and in the sections below, we discuss why we believe EA will offer better returns than PPG 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. PPG IndustriesWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

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1. Electronic Arts’ Revenue Growth Is Better

  • Electronic Arts’ revenue growth has been better, with an 11% average annual growth rate in the last three years, compared to 6% for PPG Industries.
  • Gaming companies benefited from lockdowns during the pandemic, as gamers spent more time on gaming. However, this trend has now cooled off.
  • Electronic Arts’ recent revenue growth has been driven by its live services offering, primarily for the FIFA franchise.
  • Furthermore, the company has benefited from recent acquisitions, including Playdemic, Codemasters, Metalhead Software, and Glu Mobile.
  • Looking forward, the company should benefit from its recent release of Star Wars Jedi: Survivor and continued growth in its sports franchises.
  • Pricing gains have primarily led PPG Industries’ revenue growth in the recent past. The Latin America region has been the best performer for the company, with its sales growing in double-digits for the past few years.
  • PPG Industries also benefits from its acquisitions – Tikkurila, Worwag, and Cetelon (acquired in 2021).
  • Looking at the last twelve months, Electronic Arts’ 13% sales growth fares better than 3% for PPG Industries.
  • Our Electronic Arts Revenue Comparison and PPG Industries Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Electronic Arts is expected to see faster revenue growth in the next three years, driven by continued expansion of its live services and sports games.

2. Electronic Arts Is More Profitable

  • Electronic Arts’ reported operating margin slid from 26.1% in 2019 to 17.9% in fiscal 2023 (fiscal ends in March), while PPG Industries’ operating margin fell from 11.6% in 2019 to 8.1% in 2022.
  • Looking at the last twelve months, Electronic Arts’ 20.6% operating margin fares better than 10.1% for PPG Industries.
  • PPG Industries has undertaken restructuring measures to bring its overall costs down. This, clubbed with price increases to offset inflationary pressures and acquisition synergies, will likely help PPG expand its operating margin in the coming quarters.
  • Our Electronic Arts Operating Income Comparison and PPG Industries Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Electronic Arts fares better, with its 6% debt as a percentage of equity lower than 24% for PPG Industries, and its 19% cash as a percentage of assets is also higher than 7% for the latter, implying that EA has a better debt position and more cash cushion.

3. The Net of It All

  • We see that Electronic Arts has seen superior revenue growth, is more profitable, and has a better financial position.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe EA will offer better returns in the next three years than EA.
  • If we compare the current valuation multiples to the historical averages, Electronic Arts fares slightly better. Electronic Arts stock trades at 4.4x trailing revenues compared to its last five-year average of 5.7x, and PPG Industries’ stock trades at 1.7x trailing revenues vs. the last five-year average of 2.1x.
  • Our Electronic Arts (EA) Valuation Ratios Comparison and PPG Industries (PPG) Valuation Ratios Comparison have more details.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 25% for Electronic Arts over this period vs. a 6% expected return for PPG Industries stock, based on Trefis Machine Learning analysis – Electronic Arts vs. PPG Industries – which also provides more details on how we arrive at these numbers.

While EA stock looks like it can offer better returns than PPG 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.

 Returns Sep 2023
MTD [1]
YTD [1]
Total [2]
 EA Return -1% -2% 51%
 PPG Return -8% 4% 38%
 S&P 500 Return -5% 12% 92%
 Trefis Reinforced Value Portfolio -6% 24% 537%

[1] Month-to-date and year-to-date as of 9/28/2023
[2] Cumulative total returns since the end of 2016

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