In Focus: Electronic Arts
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” - Warren Buffett
As we push through earnings season Wall Street analyst have declared falling skies on many of good companies, which has caused investors to sell quickly and stock prices to fall briskly.
Unlike Warren Buffett I do like the idea of quarterly reports. I like that investors get a chance to assess their investments quarterly should they choose, but I think the Wall Street analyst "expectation" part of earnings season can be a bit over done.
This leads us to Electronic Arts (EA). For Q2 2019 the company beat Wall Street expectations by $0.45 and revenue estimates by $110 million. For our readers new to investing, Electronic Arts made $0.45 per share more than Wall Street thought they would in the three months making up their second quarter; and the company sold $110 million more products and services than Wall Street analysts expected in that same time period. This all sounds good, but the Electronic Arts stock price didn't increase on the earnings news. Overall in Q2 2019 EA made 34% more money than they did in Q2 2018, thats not bad. (EA Fiscal Year is April-March)
Graphic: The Seville Report
The Art of Value vs. The Electronic Arts
EA's stock price has been on the decline since August of 2018 after their Q1 earnings release. In Q1 2019 the company beat EPS estimates by $0.22 and revenue estimates by $6.5 million, but revenue was down 3.4% when compared to Q1 2018.
Wall Street isn't gravitating towards the stock after Q2 2019 earnings report because of what the company expects to earn in revenue for the entire 2019 fiscal year, which is lower than what Wall Street expects. EA announced they expected full year revenue of $5.2 billion, Wall Street analyst expected $5.26 billion.
Yes! We Still Play Video Games
EA has a lot of qualities we love to see in a company. It has growing revenue, stable net income, steady free cash flow, more cash and cash equivalent than debt, a share repurchase program in place, and it operates in an industry that continues to attract new consumers. We'd love a dividend, but you can't have it all.
Right now EA is trading just above it's 52 week low of $89.12. Wall Street has beaten the stock price down from its 52 week high of $151.26. This seems like a good time to get into the video game business with EA.
The company's marquee titles Madden and Fifa continue to be blockbusters. In Q2 2019 Fifa's mobile daily active users were up 50% from Q1 2018, which speaks well of the company's efforts to penetrate the mobile gaming market. Yet the metric we feel is the most important for video game companies is digital sales or as EA labels it Digital Net Bookings. For EA its digital net bookings for the trailing twelve months are up 11%.
As a video game player I really dislike the new economics of video games. Paying $60 for a game, and then another $50 to unlock additional content within the game feels like I'm being cheated out of a full game at the time of the initial purchase. It feels as if the first $60 was to watch the trailer and the additional $50 was for the real experience, but that's just my old school opinion.
While I do dislike them, in game purchases can give new life to an old game, and by the increase in digital net bookings, players seem to be okay with this. From the standpoint of the creator it's selling the consumer the same game twice, sometimes three times. In game purchase revenue will continue to be a big time money maker for gaming companies in PC, console, and mobile devices.
Tis the Season and Beyond
For the holiday season EA has it's war franchise Battlefield V coming. Early next year they plan on releasing a new game Anthem, and further down the pike there is another Star Wars game coming. EA is the creator of Battlefront and Battlefront 2, two top selling games based on the Star Wars franchise.
The Summary, But Not Really
Our recommendation is BUY and accumulate EA while Wall Street is asleep. The turbulent markets likely had a hand in bringing EA's stock price down to these levels, take advantage if you can. At the current stock price of $92.46 EA is a $28 billion company. This valuation seems low for a company that holds the titles EA holds, and that has the ability to make reoccurring revenue off of these titles. As EA's stock continues to trade in the low $90 range we feel you should be a buyer.
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P.S. Our bold prediction is that video game companies will transition to streaming primarily within the next 2-3 years and dwindle down physical copies of games within the next 4-6 years. Streaming will likely come in tiers, the first tier will be the basic game, the second tier will be the basics plus some downloadable content (DLC), the third tier will be tier two plus all DLC created. Streaming will also provide accessibility to older games in a gaming companies catalog. It's going to be tricky because every company is going to want to do it, leaving the consumer trying to figure out which streaming service they prefer, EA or TakeTwo, Sony or Activision? This is going to lead to massive consolidations in the gaming industry, as gaming companies try to get as many titles under their roof as possible. This again is just a bold prediction, so take it with a grain of salt.
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