Shares of Electronic Arts (EA -0.21%) surged higher following a better-than-expected fiscal fourth-quarter earnings report. The company says it now has 580 million unique player accounts, and these players appear to be spending more time playing games.
In fiscal 2022 (which ended in March), total net bookings (a non-GAAP measure of revenue) grew 21% to reach $7.5 billion for the year. While this growth was boosted by last year's acquisition of Glu Mobile, EA's FIFA soccer game and competitive esports shooter Apex Legends continue to look strong. Most importantly, FIFA finished the fiscal year with over 150 million player accounts, highlighting the importance of the franchise to EA's growth.
Despite losing the license to produce soccer games under the FIFA brand recently, EA is in growth mode and returning cash to shareholders through dividends. As a sign of confidence in the future, EA increased its quarterly dividend by 12% to $0.19 per share, payable on June 22 to shareholders of record on June 8.
Heading into the earnings report, the stock was drifting down with the broader market. But after the latest round of earnings, the stock looks cheap at a forward price-to-earnings ratio of 17.8 based on fiscal 2023 earnings estimates. With the company posting profitable growth and raising the dividend, and a deep pipeline of new releases in the works, the stock looks like a great investment at this valuation level.
The key games driving growth at EA
The recent news that EA was rebranding its FIFA franchise to EA Sports FC starting in 2023 might have left some investors concerned about the future of the franchise. EA had been in negotiations to extend its exclusive licensing agreement with the Federation Internationale de Football Association (FIFA), but the talks apparently broke down.
A story in the New York Times reported that FIFA was asking for more money, which EA wasn't willing to pay. Given the popularity of the EA Sports brand, it was probably a wise move. EA may not need the FIFA logo to sell more copies of the game.
In the quarter ending Sept. 30, EA will release the final installment of its soccer game under the FIFA brand. However, the 150 million players in the game are not likely going anywhere once the game is rebranded starting in 2023. The large player base creates a network effect advantage for EA. Anyone who likes soccer and video games will naturally want to play the title that has the most players.
Time spent across EA's games looked very healthy in the quarter ending March 31. Live services bookings, which include in-game spending for FIFA and other EA Sports titles like Madden NFL, grew 17% year-over-year in fiscal 2022 and represented 71% of EA's total bookings. Management credited player engagement in FIFA and Apex Legends for the increase.
As for Apex Legends, the popular esports shooter appears to be taking players away from Activision Blizzard's Call of Duty. While Activision reported a decrease in bookings for the Activision Publishing segment last quarter, Apex Legends grew bookings 40% year-over-year.
Apex Legends has now generated $2 billion in cumulative bookings since its release three years ago. It has steadily grown in popularity since its launch, but there's more to come. EA reported that the beta test of the mobile version is going well with the official launch approaching.
The stock offers growth and value
The decision to raise the dividend by 12% reinforces management's positive outlook for fiscal 2023 and beyond.
During the earnings call, CEO Andrew Wilson said, "Our pipeline for this year and future years features big, beloved IP that we cannot wait for players to experience, including Need for Speed, Dead Space, Star Wars, The Sims, Skate, our Bioware franchises and Lord of the Rings."
EA generated $1.7 billion in free cash flow last year on $7.5 billion in bookings. It's got more room to keep raising the dividend for many years given the low payout ratio of 11% relative to free cash flow. Analysts expect earnings per share to grow 13% annually over the next five years, and at the lower price-to-earnings ratio, the stock should increase proportionally.
Electronic Arts is a solid investment, offering long-term exposure to the growing video game industry and a dependable stream of income for those who like dividends.