Electronic Arts Inc. (NASDAQ:EA) is a Redwood City, California-based video game company and second-largest publisher in the world. It’s a strong industry competitor that has licensing deals with Disney (DIS), FIFA, the NFL, NHL, and UFC. This makes it a major player in gaming, esports, streaming, and mobile.
You probably know somebody who buys their games, so is Electronic Arts stock a Buy?
Each of its exclusivity rights is good for at least the next two to four years. And the company added to its portfolio by outbidding rival Take-Two Interactive (NASDAQ:TTWO) to spend $1.2 billion for Codemasters. The developer creates racing franchises, like Formula One and DiRT.
It’s the latest in a string of acquisitions from a company notoriously criticized for anti-gamer business practices. And its treatment of the game studios it buys (along with its methods of buying them) has been questioned too.
Will Electronic Arts give investors high scores or get their portfolios red flagged?
Electronic Arts Founded By Apple Alum
Electronic Arts (EA) is one of the biggest gaming companies in the world. It was created in 1982 by Trip Hawkins, an Apple employee and an early computer programming pioneer.
After several attempts at productivity software, it struck gold with Skate or Die!, a skateboarding video game that predates the Tony Hawk series from Activision.
EA franchises includes Battlefield, Need for Speed, Apex Legends, and The Sims, along with the iconic Madden NFL series. In fact, EA Sports is one of the most profitable revenue streams for the company.
Over the years, EA grew through a series of acquisitions, including BioWare, Respawn Entertainment, DICE, Maxis, and PopCap Games.
It also scored some major wins through licensing deals. EA is responsible for Star Wars games across platforms, along with mobile games for The Simpsons (Disney), Scrabble (Hasbro), and more.
The company is also a big player in esports and competitive gaming, holding regular Madden, FIFA, and Apex Legends tournaments around the world. It created big waves in the pandemic because of its deep penetration on Twitch, Discord, and other gaming-related platforms.
It also has a streaming platform, EA Play, that reached over 6.5 million paid subscribers in 2020.
In fact, the company was the first to stand against Microsoft (MSFT) in the 2000s by insisting its games run on EA servers instead of Xbox Live. This was a pivotal moment over a decade before cross-platform went mainstream.
Is Electronic Arts Stock A Buy?
Electronic Arts share prices fell to a 52-week low of $85.69 during the worst of the 2020 stock nosedive, but they quickly recovered to trade in the $140 range by year end.
After a detailed financial analysis, which factors in financial statements, top line growth and expense projections, the cash flows discounted to the present day yield a fair value of $150 per share for Electronic Arts.
The company’s annual dividend yield is 0.53 percent, or $0.68 per share divided into four quarterly payments. On top of that, it started a $2.6 billion share repurchase program that, combined with the dividend, will return $3 billion to shareholders over the next two years.
EA has $5.9 billion in cash and equivalents and very little debt weighing it down. Its gross profits mostly come from digital sales, in-game microtransactions, and subscriptions. EA Sports Ultimate Team is a big revenue driver, with 30 million players.
Net bookings in the 12 months heading into the 2020 holiday season rang in at $5.58 billion as the company launched new UFC, Madden, and Star Wars titles. This gave it a record $2.04 billion in net cash for the year and $1.38 billion in profits
It’s already halfway through its fiscal year 2021 and has released over 125 games, add-ons, and expansions. And the release of a new generation of consoles gives it a new audience to which it can sell its games.
But every touchdown has a defense to overcome.
EA Can Infuriate Gamers, Here’s Why
EA’s acquisition of Codemasters brought out the same criticisms it faced for decades. Gamers and developers often complain the company is anti-gaming, especially in its mobile games. EA uses what’s known as paywalls and loot boxes to generate income, and where it sets the boundaries can infuriate users.
Paywalls are inserted into free-to-play and paid games to force players to buy their way through obstacles instead of using skill. For example, players may have an overpowered weapon that can only be beaten by buying one that’s even more powerful.
On the other side of this, loot boxes randomize what you’re buying. Instead of directly purchasing the OP weapon needed, you must buy loot boxes that give you a 1/10 chance of getting it. This blurred the lines between gaming and gambling and drew the ire of government regulators around the world.
EA also spends heavily on its licensing deals and losing something like an NFL or PGA contract could be detrimental. And it has big rivals willing to pick up any IP it drops.
EA Competes Against Take Two & Activision
EA runs a cutthroat business, and it has already largely beaten Take-Two’s 2K Games in football by signing exclusive rights with the NFL. And the company has more money than rival Activision Blizzard (ATVI), which is weighed down by a burdensome debt.
And the 2018 shooting at a Jacksonville Landing Madden tournament showed just how important security is at these major events. The country is divided, and EA Sports could have future issues when emotions run high in competition.
Still, EA’s deep integration with athletes from both sports and esports, the company’s legacy should last long past the next decade.
Is Electronic Arts Stock a Buy? The Bottom Line
Electronic Arts is one of the biggest video game companies and most profitable sports companies in the world. It has a deep portfolio of franchises that appeal to every level of the gaming culture, from competitive gamers to streamers and casual gamers.
The company outbid Take-Two (TTWO) to add racing game darling Codemasters to its roster too.
Its low level of debt and regular dividend payments gives investors reason to look into this stock. And its high cash flow and digital-first business model could carry it through another 30 years of success. Of course, it will keep renegotiating those lucrative licensing contracts every few years.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.