Pause or Play With Electronic Arts?

In the radically changing gaming industry, one player that has managed to sync itself to the dynamic environment is Electronic Arts (Nasdaq: ERTS  ) . Being a gamer myself, I like to keep a close watch on the industry. This interest has pushed me to see how Electronic Arts is doing.

What's going on?
EA has gotten off to a very good start in fiscal 2012. Backed by increased product sales and better recognition of revenue, the top line surged 22.6% over the year-ago quarter. The bottom line skyrocketed 130% from the year-ago quarter because of both better performance of digital games and services and better cost-management initiatives. The company's five-year revenue compound annual growth rate stands at a high 19.3%, and it also maintains a more than decent gross margin of 76%.

Very recently, EA acquired PopCap Games. This move has added greatly to the success of EA's digital business and enabled the company to enjoy a stronger position in the social gaming space. With 71.5 million monthly active users, EA is now the second largest social gaming company on Facebook after Zynga. The company is also coming up with some strong product offerings. Its newest offerings, Tiger Woods PGA TOUR 12: The Masters and Syndicate, are set to get the gamers excited and may just change the rules of the game. In the forthcoming holiday season, both of these products are likely to push the top line of the company even higher. The management is also expecting higher revenue than it had previously, due to revenue coming from PopCap and higher forecasted foreign exchange and distribution revenue.

It's evident that the company is charged up to take on competition, and if it ever decides to go for a debt financing to support its plans, it should be able to raise funds, since currently EA is unlevered and maintains an impressive cash position of $1.17 billion.

The financial and the operational performances of EA have been good, no doubt. But how cheap is it?

Valuation
The company has been performing quite well. But past performance cannot be the only thing that influences investors to dive right in. I personally feel the value-for-money concept is on the investor's mind all the time. At least, it's on my mind 24/7. This is why I feel a comparative landscape is a better way to judge an investment decision. Let's take a look at some important metrics.

Company

TEV/EBITDA

Forward Price to Earnings Ratio (NTM)

Electronic Arts  38.44 22.83
Activision Blizzard (Nasdaq: ATVI  ) 8.15 15.96
Take-Two Interactive Software (Nasdaq: TTWO  ) 18.37 11.77
GameStop (NYSE: GME  ) 4.16 8.37

Source: S&P Capital IQ. NTM = next 12 months.

If we compare EA with its peers on the basis of the above trailing ratios, the stock may look like an expensive buy. The forward P/E tells a similar story. Now the question is, is EA worth 23 times forward earnings? I think it might be, considering its turnaround and robust growth plans.

Foolish bottom line
EA looks more expensive than its peers. But that doesn't necessarily make it a bad stock. Next quarter, analysts expect EA to grow by 58% -- much faster than the breakneck expected industry growth of 31.2%. Keeping future expectations in mind, EA could very well be an intriguing stock.

  • To add Electronic Arts to your watchlist, click here.
  • To add Activision Blizzard to your watchlist, click here.
  • To add Take-Two Interactive Software to your watchlist, click here.
  • To add GameStop to your watchlist, click here.
Navneet Bajaj doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of GameStop and Take-Two Interactive Software. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Take-Two Interactive Software and Activision Blizzard. Motley Fool newsletter services have recommended creating a synthetic long position in Activision Blizzard. Motley Fool newsletter services have recommended writing covered calls in GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 26, 2011, at 4:45 PM, woltra wrote:

    I'm a gamer as well and EA has a product that is gonna be out in Dec that might seriously give Activision Blizzard a run for it's money. Some general background is that for many years now ATVI has held the undisputed king in MMORPG's, (World of Warcraft) but as of late players are leaving the game. My guess is that it's been awhile and even though they try to keep giving players new content via expansions it's still getting old. People are hungry for a new gaming experience and this is creating a vacuum of sorts that is going to be filled one way or another. I know recently they were trying to entice players to sign up for a yearly subscription (rather than just monthly) and trying to temp them by offering free game deals. My guess is that they are hoping to hold on to players in light of the new EA release "Star Wars: The Old Republic" which is promising to be an amazing new MMORPG.

    These types of games are hugely profitable because not only are players willing to shell out the initial $50-$60 bucks to install the game (and don't forget the expansion packs, each an additional $45-$55), they also pay ongoing subscription fees every month.... think millions of players continually paying $12-18 a month... for years on end... it tends to rack up nicely.

    This is not just a game for kids either, many mature adults play these games as well. Imagine if you will entire families gaming together... I've seen it happen, and each player in the family buys the games, the expansions, and also the subscription fees. Do you see $$$$ yet?

    People are willing to pay this monthly fee because it's actually a rather cheap form of entertainment. Why just watch a movie for 2 hours at $7 bucks a pop, when you can literally be IN THE MOVIE for $15 a month unlimited hours worth of entertainment. I know from my own gamer sons that they don't watch t.v. anymore, they would rather play these games. They get their friends over, they all have laptops, they hold weekly parties where they just hang out and form a team where they take on challenges in games. They love it and they have a blast!

    They are all drooling over the chance to get involved in something like this...

    http://www.youtube.com/watch?v=l1KM3E0emjg&feature=relat...

    This new game already has amazing name recognition, it appeals to both young and old in that the Star Wars brand in general has always been a blockbuster. They've got LucasArts on the job, it looks like it is going to be very very cool indeed.

    A few years ago another company tried to launch a Star Wars based MMORPG and the game itself was a dud, and the timing was off. WoW still had a very loyal fan base. But now.... the winds of change are stirring. In the beginning was Everquest (EQ), then World of Warcraft made EQ a virtual ghost town. WoW had better watch out because SWTOR may just be the new boomtown! My and my family are going to be there.

  • Report this Comment On October 26, 2011, at 5:38 PM, woltra wrote:

    I just found the trailer I was looking for, this one is much shorter than the full length link above...

    For those who want the short and sweet version this video is only 2:47 long

    http://www.youtube.com/user/swtheoldrepublic?v=Nd8iZB4IW_o&a...

  • Report this Comment On October 26, 2011, at 6:12 PM, TMFBiggles wrote:

    @ woltra -

    SW: TOR has 700,000 preorders, with about 8 weeks to launch. It'll be a big hit this winter, but I've heard that it's design is too similar to WoW's. Games that emulate WoW's design too closely have lost a lot of subscribers after early release hype. I hope it succeeds, but the MMO market really needs to grow beyond WoW clones.

    Have you tried to get into the beta? It might be open beta now, so you can get a feel for gameplay and let us know how it handles, so to speak.

    - Alex Planes

  • Report this Comment On October 26, 2011, at 6:21 PM, Bristinwolfsong wrote:

    I think the article is missing some big items from EA for one they have launched there Origin service which will compete with Valves Steam and 2 Battlefield 3 is not even mentioned?

  • Report this Comment On October 26, 2011, at 9:35 PM, woltra wrote:

    @ bristinwolf

    good to know they've got more tricks up their sleeves too. EA is stepping up their game apparently ;)

    @ alex

    We have not played beta yet, and are probably going to wait until Christmas to unwrap our games to try them out.

    I think other games trying to go head to head with WoW in the past had bad timing, or downright bad game play. My son's did try out a few and always came back to WoW. I don't think similar game mechanics will hurt because people often like something that feels similar rather than having to learn an entirely new way to function. Everyone tends to download custom UI's anyway, so they are going to set it up the way that is most comfortable for them.

    At any rate, even if some of the game mechanics are similar (they often are across many different game consoles... press this button to jump, this one to hit, etc.) this "story" is way different from WoW considerably, and therefor the in game experiences will be different. It's STAR WARS! woot! I think visually it will be stunning.

    There are a lot of other You Tube examples of game play but I didn't want to bore others with too many links. My understanding of what is different with this game is that it will run somewhat like earlier Final Fantasy games in that the story sucks you in and unfolds as you play. If you're a gamer I don't have to tell you how successful the FF series was.

    WoW only recently started playing with cut-scenes in recent expansions, but SWTOR is very rich in this area. The story is a very important part of the game play and it changes depending on which way you take your character, so you won't have to play through the same story twice if you want to develop more characters.

    I'm just saying my family and I played WoW for many years (since 2004 for my sons, a little less for myself), and we all have dropped out for similar reasons. There isn't enough to keep us there anymore, and we're not tempted in any way shape or form by "panda monks". We are ready for something different. I know MANY others feel the same way.

    So I'm just guessing that WoW will finally have some actual competition. They are going to "feel" this one.

    and gee... I'm sorry I'm going on and on. We are excited about this game's release. Just thought it would be appropriate to give a little insight beyond the basic financial info.

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