We're in the heart of earnings season for video game publishers, with companies like Nintendo and Sony reporting results this week.
One video game publisher that continues to impress with its financials is Electronic Arts (EA -0.11%). The maker of various sports franchises and other video game content posted strong growth for its fiscal year that ended in March. It has a rich slate of games coming in the next two to three years, and continues to return capital to shareholders through stock repurchases and dividends. On May 11, the day following EA's report, the stock was up 10%, showing Wall Street's optimism for the company.
Even though the stock is up 10% following the report, it's not too late to take a position in EA. Here's why.
Image source: Getty Images.
Steady growth from sports
The core of EA's business is EA Sports. And specifically within EA Sports, the most important franchise is FIFA Soccer. With the steady increase in video game players around the world plus the new consoles from Xbox and PlayStation, EA Sports was able to grow its business again last fiscal year. FIFA 22, the latest iteration of the popular soccer title, is the most successful game in franchise history, although management did not give any hard data for context around how big the game actually was.
Outside of the core console/PC title, the revamp of FIFA Mobile is going quite well, with the first three months of 2022 being its biggest quarter ever. Unique players are up 80% year over year. And while management did not give any context around how much revenue the game is generating, it is likely that more users mean more people spending on in-game live services.
FIFA is the most important franchise for EA. But EA and the real-life FIFA organization have ended their naming rights partnership over a compensation dispute, with the last soccer game under the FIFA brand coming this year. After that, the franchise will be rebranded to EA Sports FC.
While at first this might sound concerning for EA's position in the soccer gaming market, it is not actually losing anything except the rights to name the game FIFA and the ability to host virtual World Cup tournaments.
It still has the rights to the majority of soccer leagues around the globe (meaning licenses to use player names) and an unmatched game codebase compared to any competitor. These are the most important factors for building a quality sports video game, and that is why I think the video gamers will still flock to EA Sports FC after the name change.
Apex Legends continues to impress
EA grew its net bookings (the revenue equivalent for video games) by 21% year over year last fiscal year. A lot of this growth is coming from its free-to-play franchise Apex Legends. The Fortnite competitor is now one of the most popular battle royale game in the world, with bookings growing 40% last fiscal year.
It is hard to gauge how big Apex Legends can get, but I think the next few years will be promising. Why? Because the franchise is set to launch Apex Legends Mobile around the world this month. Previously, only console and PC gamers could access the battle royale game, but it will now be available to a much wider audience of 2.7 billion mobile gamers around the globe.
For an example of how lucrative a successful mobile title can be, let's look at the top shooter franchise, Call of Duty. It launched its mobile title just a few years ago, and the game generated $1 billion in revenue last year for its publisher, Activision Blizzard.
EA's total bookings (again, similar to revenue) were $7.5 billion last fiscal year, so if Apex Legends Mobile is anywhere near as successful as Call of Duty Mobile, it should drive significant top-line growth.
A strong pipeline of new content
The slate of new games doesn't stop at Apex Legends Mobile. EA has many games coming down the pipeline, with its various studios around the world working on getting them out over the next few years. These include:
- Lord of the Rings: Legends of Middle-Earth (mobile title)
- Battlefield Mobile
- A Deadspace remake
- Multiple Star Wars titles
- The return of EA Sports College Football (2023)
EA will always be driven by the live services from its soccer franchise and increasingly Apex Legends. But with these new mobile initiatives and other games coming out, there's a chance this business is much larger and more diversified three to five years from now.
A reasonable valuation
Last year, EA generated $7.5 billion in net bookings and $1.9 billion in operating cash flow. This upcoming fiscal year, it is expecting to generate $7.9 billion to $8.1 billion in net bookings and $1.6 billion to $1.65 billion in operating cash flow.
The bookings growth looks solid, but why the expected decrease in cash flow generation? This is because of the timing of EA's game releases over the next few years, with many big titles expected to either launch or be fully operational two to three years from now, hurting EA's current profitability but setting it up for long-term success.
It also continues to repurchase shares ($325 million worth just last quarter) and has a small dividend yielding 0.55%.
At a current market cap of $34.6 billion, EA trades at a forward price-to-operating cash flow (P/OCF) of 21 if it can hit the high end of its guidance. That might not seem too attractive in the current market environment, but investors should remember that due to game-release timing, this is a heavy investment year for EA. If things go well, the company should be generating well north of $2 billion in cash flow a few years from now. In my mind, this makes the stock a buy at these prices.
