Electronic Arts: +15.9%
SINGAPORE (June 26): Nasdaq-listed Electronic Arts (EA) develops, publishes and distributes branded interactive entertainment software worldwide along with online game-related services. To recap, EA is a bellwether stock when it comes to online gaming and continues to grow its footprint globally with exciting new titles from pre-existing franchises such as Fifa, The Sims and Battlefield. EA performed relatively well in our portfolio with a 15.9% return in just six months and handily outperformed the other three benchmark indices, the Dow Jones, S&P 500 and MSCI US which lost 9.7%, 5.2% and 4.7% respectively.
The impact of Covid-19 on the stock has been unsurprisingly positive for the company, which ties well with its strategy of expanding sales of full-game digital downloads, mobile and live services compared to traditional packaged games purchased from bricks-and-mortar stores. This positively impacts EA because it should create a steadier and more predictable revenue stream.
Intuitively, due to lockdown measures globally, the use of online services, particularly gaming, has significantly increased, which positively impacts the business. EA’s gaming titles are also diversified as they cover a wide range of gaming genres, which allows it to tap into user bases with different interests, such as racing fans with Need for Speed and sci-fi fans for Star Wars.
For the FY2020 ended March 31, EA strongly outperformed analysts’ expectations. Compared to FY2019, EA’s net revenue and operating cash flow grew 11.8% and 16.2% respectively. EA’s strategy of focusing on optimising margins by investing in their in-game content has paid off well, with the company’s operating margins improving to 26.1% from 20.1%. Liquidity and solvency ratios of the company are also good, with a current ratio of 2.5 times and debt-to-equity ratio of just 16.4% respectively. The company’s free cash flow yield is also attractive at 4.4%.
EA is also one of the most attractive gaming companies regionally, as it trades at a discount for its PE, EV/Ebitda and P/B, at 19%, 20% and 6% respectively compared to the industry average.
Moving forward, EA is expected to have a strong year, supported by the release of 9th Gen consoles from Microsoft’s Xbox and Sony’s Playstation, along with additional demand from the holiday season. EA also has exciting gaming titles lined up for its FY2021, for example Fifa 21, Command and Conquer and Madden NFL, which should provide earnings visibility over the period.
Additionally, EA can capitalise on the growing e-sports industry trend which they can monetise through increased partnerships and events such as online tournaments.
Analysts have given a 12-month target price of US$128.29 ($178.6), which is lower than the current trading price of US$130.19. The target prices range from US$110 to US$151 with 21 “buy” calls, 12 “hold” calls and no “sell” calls. We think that EA has further potential to grow in value, and estimate that this stock holds at least a 10% upside by the end of the year. EA is a great stock to own as it is in a growing industry with strong and attractive financials.
