BThis news came from California on February 1st, as the publisher of video games Electronic Arts (NASDAQ:EA) reported its third quarter results for the three months ended December. The company has seen big growth numbers across its portfolio, with the time spent on its games up 20% year over year in fiscal 2022. Electronic Arts is currently in full swing.
However, the stock Low 6% in the last 12 months. This disconnect between the stock price and business fundamentals offers investors a great opportunity to pick up a few shares of this high quality stock. Here are four reasons why Electronic Arts (EA) is a straightforward investment right now.
1. Constant momentum in the industry
EA has delivered strong returns over the years — the stock is up 27,000% since it went public just over three decades ago. A major reason is the steady growth in consumer spending on video games. In 1990, right around the time EA went public, the world video game industry was $31.4 billion. In 2021, consumers spent an estimated $178.4 billion on video games – and that number is expected to reach $269 billion in 2025.
This consistent growth, coupled with EA’s execution and competitive advantages, has seen the company grow its annual revenue from less than $500 million in the early 1990s to $6.5 billion in the last 12 months . With nearly $100 billion in new video game spending expected over the next five years, EA’s revenue growth should benefit greatly.
EA Revenue Data (TTM) by YCharts
One concern investors might have is EA’s focus on console/PC games versus mobile games. Mobile is the largest and fastest growing segment within the overall gaming market, which is likely to continue over the next decade. While EA has struggled with mobile in the past, it has recently made some strong moves to strengthen its mobile portfolio.
EA bought two studios, Glu Mobile and Playdemic, for $2.4 billion and $1.4 billion respectively last year to bring more mobile titles and developers under its umbrella. the FIFA football The mobile game that has struggled to gain as much popularity as the console/PC version has just received a makeover that will hopefully propel it into the highest-grossing mobile charts for years to come. Apex Legendssecond most popular game after EA FIFA footballis releasing a mobile version this year.
These initiatives resulted in EA’s mobile bookings (the revenue equivalent for video game companies) growing 68% year over year to $320 million in the third quarter. Investors should expect this strong growth to continue as EA successfully releases more mobile titles over the next three to five years.
2. Duopoly in sports games
One thing that makes EA such a long-lived company is the monopoly or duopoly it has over many of its sports titles. EA Sports has an exclusive license to publish soccer simulation video games until 2026 Madden NFL a monopoly with his game.
FIFA football, EA’s other major sports franchise, doesn’t have an exclusive license to produce a soccer simulation game, but does have licenses from hundreds of leagues around the world, giving it exclusive access to most of the top soccer players. This has resulted in the franchise becoming a virtual monopoly on soccer video games, significantly outperforming its competitor Pro Evolution Football over the last decade.
EA is more than just sports with many other big franchises like it Apex Legends, The Simsand battlefield Growth drivers for the company. But much of the company’s profits come from FIFA football and Madden NFLtwo franchises that dominate their respective markets and generate highly predictable revenue streams each year.
3. Favorable valuation
EA expects to generate $1.9 billion in cash flow from operations for its fiscal year ending in March — which is the best profitability metric for video game companies. That’ll be down slightly from last year, but that’s because EA had to make four acquisitions this year, creating a series of one-off expenses. Once those fall off the income statement over the next year, EA is on track to generate well over $2 billion in operating cash flow annually.
EA has a market cap of $38 billion as of this writing. Assuming the company can generate at least $2 billion in cash flow over the next fiscal year, the stock trades at a forward price-to-operating cash flow (P/OCF) of 19. For a company with a strong track record of revenue growth and a dominance in soccer and soccer video games, a P/OCF of 19 seems like a bargain for long-term investors.
4. Strong returns on investment
Let’s finish with EA’s increasingly impressive track record of returning excess cash to shareholders. Over the past 12 months, EA has repurchased 9.4 million shares of common stock, which has helped reduce the total number of shares outstanding. Why is this helpful? If you’re a remaining shareholder of EA, your ownership of the company has increased, which is a plus as long as EA’s fundamentals remain intact (and they have).
EA has consistently reduced its share count over the past five years, bringing its outstanding shares down from around 305 million to 281 million today. In addition to these stock buybacks, EA introduced a quarterly dividend that currently yields 0.50%. While that’s not huge, if EA continues to generate excess cash flow, management can steadily grow that dividend payout over the next decade and beyond.
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Brett Schafer owns Electronic Arts. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.