Investors Dinged an Outperforming Electronic Arts; GrubHub Stock Popped on Strong Growth

In this segment from Motley Fool Money, host Chris Hill and analysts Matt Argersinger, David Kretzmann, and Aaron Bush first consider the latest results from video game maker Electronic Arts (EA 0.83%). The business is still strong overall, and the outlook for e-sports appears robust. But the company is making changes to its revenue model in its efforts to avoid aggravating its loyal customers, and that can be tough on near-term profits.

Meanwhile, in the world of restaurant meal delivery, GrubHub (GRUB) reported 50% revenue growth, and the market tipped it with a 20% share price increase. The guys talk about why the stock deserves its current premium price.

A full transcript follows the video.

This video was recorded on July 27, 2018.

Chris Hill: Electronic Arts' first quarter profits came in higher than expected, but that got outweighed when EA lowered guidance for the second quarter and the full fiscal year. How concerned should people be about this, David?

David Kretzmann: I wouldn't be too concerned about this. The company, over the past year, has generated over $1.5 billion of free cash flow. They're sitting on about $4 billion of net cash. The underlying business is still very strong.

The video game business is lumpy quarter-to-quarter and year-to-year, just based on the timing of game releases and things like that. We just wrapped up the World Cup a couple of weeks ago. Now, next week, in London, the FIFA eWorld Cup Grand Finals will start, where the 32 best FIFA players in the world will descend on London. Over the past year, competitive FIFA games have attracted 20 million players from 60 different countries. EA is really trying to generate a lot of engagement with their games.

Ultimately, in the coming years, the company wants to connect 1 billion players worldwide. That larger vision at the company, backed by those strong sports titles, as well as other action shooter games like Battlefield, I think there's reason to be optimistic.

Aaron Bush: One other thing to keep in mind is that over the past couple of years, EA has made a ton of money off of loot boxes and has received a lot of criticism for that. They're very quickly trying to not do that again, and to figure out how to make money in a recurring, digital way, through other things. I think part of this change has to do with trying to figure that out.

That's not good for this year, but I think ultimately, that actually does lead to healthier growth, because it means that they're not going to be making people mad. That's kind of important. They still have tons of great franchises, and that's not going away.

Kretzmann: Speaking of that, one business model tweak that they're looking at is subscription gaming. Essentially, you subscribe, you pay a flat monthly fee, and you get unlimited access to all of their new titles. That's something they're rolling out on the PC next week. I think we'll see more of that in the years ahead.

Hill: GrubHub's second quarter revenue rose more than 50% compared to a year ago. Shares of GrubHub up nearly 20% this week. They're doing well, Matty, but this is starting to be a really pricey stock.

Matt Argersinger: It is, but gosh, I feel like they've earned the grub stake that they have in the bargain right now. You mentioned the revenue number. The number of active diners, up 70% year over year to 15.6 million. They now have over 85,000 restaurants in over 1,600 U.S. cities and London. That, to me is a pretty sizable network.

When I thought about GrubHub in the past -- shame on me for not taking a bigger look into buying the stock myself -- I always thought, you have competition. You have Uber Eats, DoorDash, Amazon has meal delivery, as well. It just felt like this was a hyper-competitive market, and it would be tough to make a lot of headway and certainly any margin in it. But GrubHub has certainly separated itself from the pack. I think, the network they're building now, they're certainly the leader.