Why Shares of Electronic Arts Inc. Popped 20% in May

Video games are hot in 2017, and that's pushing EA's shares higher. But are they too high already?

Travis Hoium
Travis Hoium
Jun 13, 2017 at 2:56PM
Consumer Goods

What happened 

Shares of video game specialist Electronic Arts Inc. (NASDAQ:EA) jumped 19.5% last month, according to data provided by S&P Global Market Intelligence, after the company reported another strong quarter. 

So what 

Fiscal fourth-quarter results were released in early May, showing revenue rose 17% to $1.53 billion while operating income jumped 34% to $717 million. Net income fell 37% to $566 million, or $1.81 per share, but that was due in large part to an income tax benefit a year ago transitioning to a loss in the most recent quarter. 

Four guys playing video games.

Image source: Getty Images.

Like its competitors Activision Blizzard and Take-Two Interactive, EA is moving to a business that generates more revenue from digital sources, like mobile and add-ons for console games. Sixty-one percent of total revenue was from digital sources, or $3.03 billion, up 20% from a year ago. Management also said it expects fiscal 2018 revenue to be about $5.075 billion and net income to be $1.125 billion, or $3.57 per share. 

Now what 

Video game companies are making a smart shift to digital revenue streams, and EA is no different. What'll be important to watch is whether or not growth continues well into double digits. Guidance for 2018 implies a growth rate of just 4.7%, which is low for a stock trading at 30.5 times forward earnings guidance. If growth doesn't pick up, this looks like a very expensive stock for today's market.