Summary
- Net bookings for Electronic Arts have increased significantly due to EA Sports FIFA 23 sales.
- However, I take the view that the company can thrive in subsequent earnings quarters.
- Strong net bookings and a declining P/E ratio could serve as growth drivers for the stock if subsequent quarters remain strong.
Investment Thesis: Strong net bookings and a declining P/E ratio could serve as growth drivers for the stock if subsequent earnings quarters remain strong.
Back in September, I made the argument that Electronic Arts ( EA ) appears to be expensive on an earnings basis - in spite of strong growth in net bookings.
Moreover, I also made the argument that over the longer-term, investors are likely to pay particular attention to performance of EA Sports FC to determine whether the company can continue to bolster net bookings and drive earnings growth.
In spite of these concerns, the stock is up by over 8% since my last article:
The purpose of this article is to assess whether Electronic Arts could continue to see upside from here.
Performance
Q2 FY23 results were quite encouraging for Electronic Arts, with the EA player network growing to over 600 million accounts at the end of the quarter, along with total net revenue up by nearly 14% over the past 12 months.
Electronic Arts Reports Q2 FY23 Financial Results
Additionally, it is also noteworthy that EA Sports FIFA 23 reportedly saw its most successful launch in the history of the franchise, with over 10.3 million players signing up to the game in the first week of its launch.
From a balance sheet standpoint, I previously noted that with a quick ratio near 1 - Electronic Arts remains in a good position to service its current liabilities using existing liquid assets.
In the most recent quarter, we can see that while cash and cash equivalents have decreased - total current liabilities have also declined, resulting in a quick ratio of 0.96.
March 2022 | June 2022 | September 2022 | |
Cash and cash equivalents | 2732 | 2082 | 1539 |
Receivables, net | 650 | 579 | 919 |
Total current liabilities | 3513 | 2833 | 2561 |
Quick ratio | 0.96 | 0.94 | 0.96 |
Source: Figures sourced from Electronic Arts Q1 and Q2 FY23 Earnings Press Release. Figures provided in USD millions, except the quick ratio. Quick ratio calculated by author as cash and cash equivalents plus receivables all over total current liabilities.
On a five-year basis, we can see that while the P/E ratio is still far above the levels seen at the beginning of 2020 - the ratio has come down from highs seen at the beginning of this year.
ycharts.com
From this standpoint, should we continue to see growth in earnings on the back of rising net bookings - then I take the view that Electronic Arts could approach a more reasonable valuation.
Looking Forward
In my last article, I had made the argument that the ending of the sponsorship deal with FIFA and the re-branding of the company's gaming title as EA Sports FC may stand to hinder further growth in net bookings, as the FIFA name has traditionally been a big part of the appeal for this gaming title.
That said, I am cautiously optimistic that the recent success of EA Sports FIFA 23 in spite of the imminent re-branding as EA Sports FC could indicate that the main pull for the wider fan base is the gaming experience - as opposed to the title of the game per se. In this regard, one could expect that EA Sports FC will continue to attract its current fan base even with a name change.
While FIFA would be free to licence its name use to another gaming company - the offering by Electronic Arts is globally recognised for its strong gaming experience and it could prove difficult for other companies to replicate that - even with an official FIFA partnership. Indeed, FIFA could find it quite challenging to partner with a company capable of delivering the gaming experience that could effectively compete with Electronic Arts - and I expect that this would allow EA Sports FC to remain the dominant gaming title in this area.
Moreover, with the World Cup ending this month - I do not expect that sales from FIFA and eventually EA Sports FC will necessarily be as crucial to raising overall net bookings going forward, with titles such as Need for Speed and NHL 23 expected to drive growth in the latter half of the year.
Electronic Arts Q2 FY 2023 Results Presentation
From this standpoint, should we see Electronic Arts continue to show strong growth in net bookings driven by other gaming titles as well as FIFA - then the stock could prove to be quite resilient.
Conclusion
To conclude, Electronic Arts has shown significant resilience in spite of concerns of overvaluation.
While the rise in net bookings has been significantly driven by EA Sports FIFA 23 - I take the view that should we see strong performance across Q3 and Q4 earnings - then the stock could be in a position to see further growth.
For further details see:
Electronic Arts: Showing Resilience