Electronic Arts (EA -1.09%), video game publisher and owner of beloved entertainment franchises like The Sims, FIFA Soccer, and Apex Legends, disappointed investors with its quarterly earnings report covering the last three months of 2022. The company saw weakening demand for one of its core franchises, delayed a big Star Wars game until its next fiscal year, and scrapped multiple mobile titles that were under development.

All of this will affect EA's financials in the near term and caused the stock to fall more than 10% in the days following the report. However, over the long term, EA still has a lot working in its favor. Let's investigate whether now is a good time to buy the dip on this video game publisher.

Q3 results: delays and cancellations

In the third quarter, EA reported a 5% bookings decline in constant currency terms. Bookings are equivalent to revenue for video game companies, and constant currency just means sales growth excluding fluctuations in foreign currencies, which are outside of EA's control. With the launch of a Battlefield game in the same period last year, a slight decline in bookings was to be expected. In fact, if you look at EA's bookings from in-game purchases, they were actually up 3% year over year (in constant currency terms) for the quarter and are up 4% over the past 12 months.

Most of this growth was driven by FIFA Soccer. EA's largest franchise has grown its bookings by 15% year over year in constant currency through the first nine months of this fiscal year. That counter-balanced some deterioration in its new Apex Legends live services title. Apex Legends is a free-to-play shooter game that was likely hurt by the record-setting launch of Call of Duty: Modern Warfare II during the holiday quarter.

The slowdown of Apex is something to watch, but the biggest letdowns for investors this quarter were game delays and cancellations. The new Star Wars Jedi: Survivor game is being pushed from the end of this fiscal year, which is in March, to the start of fiscal year 2024 in April. While those dates are only a month apart, this delay caused EA to lower its bookings and cash flow guidance for this fiscal year, which is not something Wall Street likes.

In the report, EA also announced it was scrapping a Battlefield Mobile title that was in development and Apex Legends Mobile, a game that had only launched less than a year ago.

Pipeline looks strong

The only true concern from EA's report was the scrapping of the Apex Legends and Battlefield mobile titles. This will likely set back EA's mobile ambitions for the franchises, which are supposed to be growth drivers for the company in this decade.

Management made some good excuses for the cancellations, stating that the mobile titles needed to be rebuilt so they could be connected to the console/PC versions, which is how Call of Duty has had so much success on mobile. As a shareholder, I think this makes sense, but it is frustrating that the company is only coming to this conclusion today.

Regardless of these cancellations, EA's upcoming game pipeline looks robust.

  • The Star Wars game is a sequel to the second-best-selling game in the U.S. in 2020, so it will likely succeed with an established fan base.
  • A revamped FIFA Mobile is growing bookings by 91% year over year and should start to become accretive to EA's overall top line in a few years.
  • There is also the comeback of NCAA Football, which is planned to release in the summer of 2024 along with smaller titles like Skate, Mass Effect, and some other Star Wars games.
  • Combine these with mainstay live services titles like FIFA Soccer, the Sims, and Madden NFL, and I think EA's business is in good shape at the moment.

Is the stock cheap?

As a video game publisher, EA can have some lumpy revenue growth, so it is hard to value this company on its trailing earnings multiple alone. Over the last 12 months, the business has generated $7.4 billion in revenue, up 95% from 10 years ago. While this is not a hyper-growth company, I think EA can double its top-line growth again in the next decade -- and reach $10 billion in annual revenue a few years from now -- based on its strong pipeline and the overall tailwind behind the video game market.

At a 25% profit margin -- which is around what EA has earned in the last decade -- that equates to $2.5 billion in income for the business. At a market capitalization of $31.2 billion, $2.5 billion in earnings equates to a price-to-earnings ratio (P/E) of 12.5, which is well below the current average of 22 for the S&P 500.

The company has strong growth prospects and a discounted valuation if you take a longer-term prospective, so I think now is a perfect time to buy the dip on EA shares despite any short-term concerns from Wall Street.