Electronic Arts Posts Solid Earnings, but Shares Fall On Modest Guidance

Video game studio Electronic Arts (EA 0.42%) reported earnings last Thursday. The report, which covered the third quarter of EA's fiscal year 2020, exceeded expectations on both the top and bottom lines, but it came with a mixed guidance slate and EA's shares fell as much as 5.5% on Friday's trading session.

Electronic Arts' third-quarter results by the numbers

Data source: Electronic Arts. GAAP = generally accepted accounting principles.

The video game industry may have found a comfortable ratio between digital and physical sales for the holiday period, where something you can wrap might hold additional value. Digital sales rose 24% in the holiday-themed third quarter, while packaged goods increased by a nearly identical 23%. The revenue split between digital and physical sales stood at 71/29, unchanged from the year-ago period. Digital sales accounted for a beefier 77% of total revenues over the last four quarters, up from 71% a year earlier.

Live services accounted for $677 million of top-line revenues, a 41% year over year increase. Game downloads rose by 16% to $286 million and mobile game installations produced revenues of $161 million -- an 11% decline from the year-ago report.

Going beyond the numbers

EA launched three major games last quarter, led by Star Wars Jedi: Fallen Order. Management pointed to the Star Wars title as a key driver of the quarter's significant revenue surprise.

The company also presented three new seasons of Apex Legends, which is EA's closest competitor to the Fortnite phenomenon and a leading title in EA's esports portfolio. This free-to-play game is monetized by in-game payments for cosmetic upgrades such as new player models and weapons of different colors. This was the fastest-growing revenue stream within EA's live services. Behind Apex, live services relied on solid growth in the FIFA soccer franchise and the Madden NFL football series.

Image source: Getty Images.

What's next?

Looking ahead to the next quarter and the 2021 fiscal year, EA's management expects live services to continue delivering the company's highest growth rates. The upcoming launch of new gaming consoles from both Sony (SONY 1.52%) and Microsoft (MSFT 1.05%) in the second half of this calendar year should pave the way toward impressive gains in fiscal year 2022. EA plans to prime that pump with a new title in the colossal Battlefield series.

"Live services extend and enhance the experience for players in their favorite games, and enable strong ongoing growth for our business," CEO Andrew Wilson said in EA's earnings call. "Great games and strength in live services also position us well in additional growth areas. New consoles are coming, and we'll be ready to lead with some of our top titles."

Fourth-quarter net bookings are expected to land near $1.15 billion, yielding earnings in the neighborhood of $1.05 per share. That's a mixed forecast compared to Wall Street's consensus estimates, which are calling for earnings of roughly $0.97 per share on sales in the vicinity of $1.2 billion.

Is EA a buy right now?

There was no shortage of analysts raising their target prices on EA after this report, but these target increases generally landed no more than 10% above the stock's price at the end of Thursday's trading session. The stock is generally seen as fairly valued, trading at 12 times trailing earnings and 20 times free cash flows.

EA's share prices have nearly doubled over the last 5 years, but that return is only 15% above the S&P 500's dividend-adjusted gains for the same period. One might argue that EA's stock is a reasonably accurate reflection of the broader market, albeit with wider swings and more volatility along the way. This stock does not excite me since there are so many top-quality investment ideas with far brighter prospects on the market today.