Is Electronic Arts a Buy? Video gaming giant Electronic Arts (NASDAQ:EA) is a stock that has largely been able to buck the early 2022 selloff trend.
Although not one of the meteoric tech stocks that have dominated the market in recent years, EA has several points to recommend it.
To date this year, EA is down less than double digits. This places the company’s performance over that period at a much better level than the broader stock market. The S&P 500, for example, has dropped 3x as much as Electronic Arts over the same period.
EA Revenues and Margins
In the most recent quarter, EA generated $1.83 billion in revenue, up 35.5 percent from $1.35 in the same quarter the previous year.
12-month revenue was also up markedly, rising 24 percent from $5.63 billion for the 12-month period ending on March 31, 2021, to $6.99 billion for the most recent full-year period.
EA’s gross margin for the past 12 months is a respectably high 73.41 percent. Operating margin is much lower, coming in at 16.15 percent. Net margin stands at a somewhat concerning 11.29 percent.
During the pandemic, TTM net margins spiked to levels of 50 percent or more. Even before then, however, it was fairly common for the company to report net margins in the mid-20s.
EA Growth and Earnings
EA’s most recent earnings report included a drastic miss against analyst expectations. Despite being expected to produce $1.43 in EPS, the company reported just $0.80.
This miss was quite substantial, but it has not caused the stock price to drop appreciably in the subsequent days.
Net bookings for the last quarter reached $7.52 billion, up 21 percent from the previous year.
The company’s user base grew at a more modest 16 percent, increasing to 580 million active players. Live services grew at 17 percent year-over-year.
As one might expect, EA’s closest competitors consist of other large, well-known gaming companies. These include Blizzard Entertainment, Niantic, Activision and Ubisoft.
Although each of these companies operates in the same niche as EA, the company’s stable of intellectual properties and active user base of more than half a billion players give it a fairly strong moat.
Many video gamers also play across platforms, allowing companies in this industry to have substantial crossover among their user bases.
Will EA Stock Fall?
The biggest risk factors for EA at the moment are likely its low net margin and a general slowdown in growth coming off of the pandemic.
As Netflix learned earlier this year, companies that enjoyed robust growth when consumers were forced to stay home can see reversals as the economy reopens.
So far, however, there’s no indication that this phenomenon has hit the gaming world. With EA’s user base still actively growing, it seems that the risk of a slump is relatively minor.
Is Electronic Arts a Buy?
Overall, EA stock looks like a fairly attractive option at the moment. Unlike many tech-heavy stocks, EA hasn’t suffered a major downturn so far in 2022. The company has also continued to grow at a time when other businesses are having trouble sustaining their momentum.
One of the best reasons to buy EA right now is its Apex Legends property, which is a direct competitor to the popular game Fortnite. This franchise has turned over overall growth of about 40 percent, and a recent move to mobile should help the player base to expand even more rapidly. Going forward, Apex Legends should be able to drive ongoing and sustainable growth at EA.
The stock also has the advantage of being fairly valued. EA trades at a P/E of 16.26, with a price-to-book of 4.46. Both of these metrics are solidly in line with the industry.
EA has also continued to pursue stock buybacks, supporting investors and preventing share dilution. In the last fiscal year, the company repurchased 9.5 million shares for $1.3 billion. The ability to repurchase so aggressively suggests that EA is in a very healthy financial position and is focused on rewarding its long-term investors.
Although it yields a modest 0.61 percent, EA does pay a dividend to its shareholders. For the most recent quarter, the payout was $0.17. This payout has plenty of room to grow as the company continues to expand and mature.
Finally, EA appears to have decent upside potential this year. Currently trading at $124.91, the stock’s median 12-month target price is $156. This would represent a gain of 24.9 percent. Given that EA has so far been able to sit out the punishing losses in the rest of the market, there’s a good chance that it will be able to perform well in the upcoming months.
EA is a stable growth stock with several appealing aspects. Although it does have some risks and it isn’t undervalued by any means, EA is a good buy for investors with medium risk tolerances looking for solid, steady growth in their portfolios.
Investors seeking rapid growth at high risk levels will probably prefer to hold off and search for oversold values in the emerging bear market, but EA is a solid choice for those who want their money in a more stable asset.
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