2023-05-12 01:25:30 ET
Summary
- Electronic Arts has seen slight growth in net bookings in the last quarter - which was primarily driven by demand for the FIFA gaming title.
- However, higher operating expenses due to restructuring resulted in a loss of earnings.
- I take the view that growth for the stock will be modest in the short to medium term.
Investment Thesis: I take the view that growth for the stock will be modest in the short to medium term.
In a previous article back in February, I made the argument that I did not see a case for upside in Electronic Arts ( EA ) for the short to medium term, owing to a decline in net bookings being a cause of concern for the stock - as well as a delay in the release of the Star Wars Jedi: Survivor title potentially further hindering net booking growth.
Since then, EA stock has made back gains lost near the beginning of the year - up by just over 8% since my last article.
The purpose of this article is to assess whether the rebound we have been seeing in Electronic Arts can continue - taking recently released financial results into consideration.
Performance
When looking at Q4 and FY23 results as released on May 9, we can see that total net revenue grew marginally on that of the same quarter in the previous year.
Additionally, we can see that Electronic Arts also saw a slight loss in earnings in the most recent quarter - despite slightly higher net revenue.
To put net booking performance into a wider context, I decided to generate a heatmap of net bookings by quarter for Electronic Arts from Q1 FY21 to the present.
Net booking figures sourced from historical Electronic Arts quarterly reports (Q1 FY21 to Q4 FY23). Heatmap generated by author using Python's seaborn library.
We can see that for the past three years of data - Q3 (the period covering the three months ended December 31) has shown the highest level of net bookings - coinciding with the Christmas holiday season.
It is notable that for the first three quarters of 2023 - net bookings were actually lower than that of the same quarter in the previous year. The exception is Q4 2023 - where net bookings for the EA SPORTS FIFA franchise saw net bookings grow by 31% year-on-year - which in turn raised overall net bookings.
With the rebranded EA SPORTS FC scheduled to be released in Q2 FY24 (from the beginning of August to the end of October 2023) - booking performance for the rebranded title ultimately remains to be seen. Additionally, with the FIFA World Cup having concluded last year and the next major football tournament of Euro 2024 being held in June of next year - 2023 is ultimately set to be quieter from a football marketing standpoint. As such, there is the possibility that net bookings for the new title may only start to see significant growth in 2024 - coinciding with the Euro championships.
Moreover, the major reason for the drop in net income in the most recent quarter has been down to higher operating expenses - specifically on the Research and Development and the General and administrative segments, as well as Restructuring expenses:
Electronic Arts: Q4 and FY23 Results
The company is expecting the restructuring plan to be finished by the end of September, and expects that it will incur $170 to $200 million in charges as a result of the restructuring - which aims to refocus the efforts of Electronic Arts on a handful of strategic growth priorities such as building games with large community engagement and reviewing the company's real estate footprint.
While these initiatives could have benefits longer-term, it does mean that the next two quarters are also set to see restructuring expenses impact quarterly earnings.
With that being said, we can see that throughout the past five quarters - Electronic Arts has managed to maintain a quick ratio close to 1 - indicating that the company can almost cover its current liabilities using existing liquid assets.
March 2022 | June 2022 | September 2022 | December 2022 | March 2023 | |
Cash and cash equivalents | 2732 | 2082 | 1539 | 2202 | 2424 |
Receivables, net | 650 | 579 | 919 | 836 | 684 |
Total current liabilities | 3513 | 2833 | 2561 | 3113 | 3285 |
Quick ratio | 0.96 | 0.94 | 0.96 | 0.98 | 0.95 |
Source: Figures sourced from Electronic Arts Q1 to Q4 FY23 Earnings Press Releases. 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.
In this regard, while earnings may come under pressure from higher operating expenses over the upcoming quarters - Electronic Arts seems to have a stable cash position to be able to weather this.
Risks and Looking Forward
Going forward, I anticipate that net booking growth may be modest over the next couple of quarters - given both the historical trajectory of booking growth over the past three years as well as an anticipated plateau in growth for the EA SPORTS FIFA franchise following the World Cup late last year.
From an earnings standpoint, we can see that EPS has yet to recover to highs seen during the height of COVID lockdowns in 2020, while the P/E ratio still remains substantially above levels seen during that period.
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With that being said, the P/E ratio of Electronic Arts is trading at a similar level to that of competitor Activision Blizzard ( ATVI ). From this standpoint, Electronic Arts seems to be trading at a premium on a historical basis - but nonetheless similarly valued relative to its largest rival.
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EA's competitor, Activision Blizzard (ATVI), has been set for a purchase by Microsoft Corporation ( MSFT ) for some time. However, the deal was recently blocked by a UK regulator on the basis of anti-competitiveness. Specifically, the purchase would allow Microsoft full control over Call of Duty - one of the most popular gaming titles in the world.
While the future over Activision Blizzard and its integration with Microsoft is unknown - a blocking of the deal will likely be welcoming news for Electronic Arts. While the company has publicly expressed indifference as to whether the deal goes through or not - citing EA's position as the number one publisher on the Microsoft platform - the deal would still give Microsoft access to highly popular gaming titles from Activision - which could allow the Xbox console to become a formidable competitor with that of Sony's (SONY) PlayStation or Nintendo ( NTDOY ) - potentially reducing demand for EA's gaming titles across these two consoles.
Conclusion
To conclude, I take the view that Electronic Arts is undergoing a somewhat uncertain period at this point in time. With EA SPORTS FC set to be launched later this year, it is unknown as to whether the title will hold the brand appeal of that of FIFA. Additionally, the fate of the potential acquisition of Activision Blizzard by Microsoft remains unknown - which could have a substantial competitive impact on Electronic Arts' business.
As such, I remain long Electronic Arts, but still take the view that growth in the short to medium term is set to be modest.
For further details see:
Electronic Arts: Uncertainty Around EA Sports FC Demand And Activision Blizzard Deal