It's been a rough start to the year for growth stocks, but that also means companies with above-average growth prospects are trading at cheaper valuations.
Electronic Arts (EA 0.02%) and IMAX (IMAX 1.69%) are two undervalued entertainment stocks that are poised to shoot higher. Shares of the video game giant are down about 3% year to date, while the movie theater stock has gained 9%. Both have outperformed the S&P 500 index so far this year, which might be an omen of what's to come for investors over the next five years and beyond.
Here's why EA and IMAX are attractive investments right now.
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Electronic Arts
EA is one of the leading video game companies in the world with $6.5 billion in trailing-12-month revenue. It's known for its EA Sports publishing label that makes best-selling sports franchises Madden NFL and FIFA. EA also has a portfolio of non-sports titles like its Star Wars licensed video games, The Sims, and the popular esports title Apex Legends.
The growth of the video game industry and shift to a digital distribution strategy led to strong growth in revenue and profits over the last decade. A $10,000 investment in Electronic Arts stock 10 years ago would be worth almost $78,000 today. Another eight-bagger return on your money is unlikely, but looking out over the next five years, seeing EA double its current stock price is possible.
EA now has 540 million unique player accounts across more than 18 games, and it should continue to grow this user base with management's investments in the future. For example, EA acquired three game studios last year for a combined $4.6 billion, including leading mobile game company Glu Mobile. The latter should significantly boost EA's growth profile in the fastest-growing segment of the video game industry.
What's more, EA has several new releases in the works, including mobile experiences from the FIFA franchise. It also reached a new agreement with Walt Disney's Lucasfilm Games to continue developing titles based on the Star Wars universe.
So while the company's future looks bright, the stock looks undervalued. Its forward price-to-earnings ratio has come down 28% since the beginning of last year. Based on fiscal 2022 earnings estimates, the stock trades at 18.3 times earnings. It also pays a 0.53% dividend yield. Analysts expect EA to grow earnings per share at an average annual rate of 23% over the next five years. That should be more than enough momentum to double the stock in five years.
IMAX
IMAX delivers a superior movie-going experience with its image quality, large screens, and remastered soundtracks. Besides winning over audiences, it attracts filmmakers and movie studios who seek out IMAX technology to help create more excitement around their films, giving the company a competitive advantage and making its stock a solid long-term investment.
IMAX generally doesn't operate theaters, but it licenses its technology to theater operators around the world. At the end of 2021, there were 1,683 IMAX theater systems across 87 countries, but management sees the potential to double that number long term. The growth the company is experiencing right now gives it momentum to expand aggressively.
The company just closed the books on 2021 with its best fourth quarter at the global box office since 2017. There is clearly pent-up demand to go to the movies again. In 2021, global box office revenue for IMAX increased 146% year over year, driven by the release of Spider-Man: No Way Home, Dune, and the James Bond film No Time to Die. More blockbusters coming to IMAX in 2022 include Top Gun: Maverick, Thor: Love and Thunder, and Black Panther: Wakanda Forever.
Management is still working to bring company profitability back to 2019 levels, but based on forward analyst estimates, the stock trades at an attractive valuation of 20 times forward earnings projections. With analysts expecting 36% annualized earnings growth over the next five years, the stock is another strong candidate to double from current levels.
