Electronic Arts (EA 0.79%) isn't performing at the high level that investors have been used to seeing over the past few years. The video game company recently announced a surprising decline in its core growth metric despite having released several highly anticipated titles.
Executives signaled that the tough demand environment will continue into 2023 as well, so they took moves to cut costs and delay a few launches.
The fiscal third-quarter report sent shares lower, although the stock has roughly kept pace with the S&P 500's 10% decline in the past year. With that big picture in mind, let's look at the prospects for this leading video game developer's stock in 2023.
Times are changing
EA had a packed launch calendar for the third quarter, which ran through late December. It released two major titles, NHL 23 and Need for Speed Unbound, plus 128 pieces of new content across 36 of its existing brands. Several of these franchises, including The Sims and FIFA 23, posted strong engagement and monetization trends.
But there were some significant misses, too. EA's latest Apex update didn't draw as big an audience as management had hoped to see. And gamers across the board seemed less eager to spend money on digital entertainment.
Overall net bookings fell 9% and are now down 1% over the trailing-12-month period. In a conference call, chief financial officer Chris Suh said, "The performance of new games was below the levels we had anticipated."
The good news
EA remained highly profitable, in part because executives quickly reacted to the shifting demand trends by cutting costs. Operating income has grown to $1.2 billion in the past nine months compared with $800 million in the prior-year period. Free cash flow is weaker but remains positive at $1.2 billion, compared with $1.7 billion a year earlier.
EA free cash flow data by YCharts.
This allowed EA to continue returning plenty of cash to shareholders through stock buybacks and its dividend payment.
The path forward
EA is making many shifts to its release plans, partly in response to the changing selling environment. It has delayed a few titles and reduced expectations around several launches that will occur in the fiscal fourth quarter, ending in late March.
At the same time, several of EA's tentpole franchises are performing well and continue to attract a bigger audience and higher spending. Games in the Madden, FIFA, and The Sims series have been standouts even as video game spending slows.
Still, with weaker spending arriving, especially in the casual- and mobile-gaming segment, EA is projecting slower growth at least through the end of this fiscal year. Management lowered its 2023 revenue forecast to between $7.25 billion and $7.35 billion from the prior range of $7.55 billion to $7.75 billion.
That update might disappoint shareholders, but it doesn't threaten the long-term investing thesis. EA just appears set for a weaker growth year in 2023 and into early fiscal 2024 while profits and cash flow remain strong.
And shares are much cheaper right now, reflecting those declining expectations. You can buy the stock for less than 5 times revenue, compared with over 7 times revenue through most of 2021.
Cautious investors might want to wait to see whether EA is expecting a rebound in fiscal 2024, which would be clearer by its next quarterly update in April. If you don't mind the elevated volatility, on the other hand, Electronic Arts stock is looking more appealing after its recent slump.
