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Equity Focus: Electronic Arts

If you own a games console or mobile device, and have played any games across the FIFA, Sims, Apex Legend, Battlefield, or Star Wars Battlefront franchises, you'll know all about Electronic Arts (EA). For better or for worse, EA is the second-largest video games company in the Americas and Europe by market cap and revenue, only eclipsed by Activision Blizzard. In this equity report, we'll take a look at EA's well-known franchises, and whether it may be worth investing in.


EA's Famous Franchises

FIFA – FIFA as a video game has been around for over twenty years, featuring on a wide range of consoles, PC’s, and more recently, on mobiles. Its most popular mode and strongest selling point is its Ultimate Team feature, where players can play games and complete challenges to build their ideal football team. Why EA do especially well with Ultimate Team is that it offers a multitude of in-game purchasing options, known as microtransactions. Players can buy packs that potentially contain players or items to either improve their teams and clubs, or to sell on the market.

The mode has become increasingly popular since its launch 11 years ago, and now, more than 100 million individuals have tried it out since the most recent launch of FIFA 20. A new game is released every September to mark (near enough) a new global footballing season, and sales have continued to rise each year, due to increasing popularity as a form of entertainment, as well as due to the rise in eSports competitions and career opportunities. The game continually adds new modes and is considered the closest virtual experience to playing real football for many.

Sims - The Sims is a series of life simulation video games developed by Maxis and published by Electronic Arts. The franchise has sold nearly 200 million copies worldwide, and it is one of the best-selling video game series of all time. While many believe that it’s arguably past its peak (since its initial launch in 2000), its latest release, Sims 4, had its best year for sales and active players in FY20 since its launch in September 2014.




Star Wars: Battlefront - Star Wars: Battlefront is a series of first and third-person shooter video games based on the Star Wars films. Players take the role of soldiers in either of two opposing armies in different time periods of the Star Wars universe. Star Wars Battlefront’s series is just one of EA’s Star Wars-based games, together with Star Wars Jedi: Fallen Order, and Star Wars: Galaxy of Heroes. One shouldn’t underestimate Star Wars’ marketing power - it is the second highest-grossing franchise of all time. New releases are always extremely popular.

Apex Legends - Apex Legends is a free-to-play battle royale game developed by Respawn Entertainment and published by Electronic Arts. It was released for Windows, PlayStation 4 (PS4) and Xbox One on February 4, 2019, without any prior announcement or marketing. The game is currently in its fourth season, and its fifth season was released a couple of months ago. It was the most downloaded free PS4 game of 2019.

Battlefield - Battlefield is a series of first-person shooter video games that started out on Microsoft Windows and OS X with Battlefield 1942, which was released in 2002. The series is developed by Swedish company EA DICE and is published by EA. The Battlefield series had already been played by more than 50 million players worldwide as of 2012, across 11 games and 12 expansion packs released since its inception in 2002. Battlefield series games usually focus on large, online multiplayer battles. Playing in squads has become a major element of games in the series, and it is regarded as a social, play-from-home pastime.

Madden - Madden NFL (known as John Madden Football until 1993) is an American football video game series developed by EA Tiburon for EA Sports. It is named after Pro Football Hall of Fame coach and commentator John Madden, and has sold more than 130 million copies. It also currently is the only officially licensed National Football League (NFL) video game, and has influenced many players and coaches of the physical sport. Among the game's features are detailed playbooks and player statistics, and voice commentary in the style of a real NFL television broadcast.

Why Invest in EA?

- Video games are considered a staple for many, regardless of the macro-economic environment. They can be a cheap source of home entertainment, and so have historically been resilient in times of recession.

- EA has weathered the storm extremely well during the Coronavirus pandemic, and outperformed expectations. The closure of physical video game stores has not impacted EA sales, as 80% of its sales are online (whether through online stores or digital downloads). FIFA 20 has seen more than 25 million unique players play in the last four-month period, while Madden NFL has had “the highest engagement levels in franchise history” (launched in 1988).

- Dynamism – just because sporting events have been halted globally, EA Sports has thrived. It has hosted community-wide tournaments and live streams, including the ePremier League Invitational Tournament, with games broadcast across Sky Sports, Youtube and Twitch. Also, the Stay and Play Cup, a $1 million charity tournament between Premier League footballers, was streamed and watched by hundreds of thousands worldwide. Over the next couple of months, in a prolonged period of lockdown, it has plans for over 100 virtual events and tournaments featuring celebrities across its various games and platforms.

- All of its main franchises are growing in sales and users.

- EA has a very strong balance sheet. Debt is significantly less than the FY20 free cash flow, and it has a debt-to-equity ratio of 48%. At $1.66bn in free cash flow for FY20, and plans to further reduce its costs, EA is in a strong position.

Opportunities for Growth

- EA has already announced plans for 14 new titles in FY21 – it has the upcoming annual updated releases of FIFA/Madden, as well as new unannounced sports games, and remastered versions of retro games – this appeals to all.

- The growth of FIFA has seen FIFA eSports grow simultaneously. eSport players are starting to earn large salaries and tournament/competition bonuses, and are being signed on large contracts by agencies. It is the future of gaming. YouTube and Twitch are also platforms where content creators of EA games are growing. Some of the most notorious FIFA YouTubers have well over 1 million subscribers. For example, KSI started out as FIFA YouTuber, and now has more than 21 million subscribers, a successful music career, and his well-publicised boxing match last year against another Youtuber generated over $11m in revenue.

- Both Sony and Microsoft have announced that their next-generation consoles will be coming to market soon – the PS5 and Xbox Series X. These will provide exciting new platforms for gamers to continue investing in EA games.

- As well as new consoles, EA is looking at acquiring new franchises. This was confirmed in the Q4 FY20 Earnings report.

- Cloud Gaming is seen by EA as the future, in which any game can be played on-the-go across a variety of devices and consoles.

- Finally, EA has announced that it is partnering with new platforms, to provide a wider experience for gamers. For example, it has entered into a partnership with popular gaming platform Steam, as well as looking at publishing some of its games on the Nintendo Switch in the near future.

Financial Highlights

- 5-Year Return on Capital Employed of 21.8%

- Modest P/E of 11x, while trading 32x at end of 2019 shows that it is potentially undervalued at the moment.

- The share price is 50% up since Q4 FY2019 results.

- Net Revenue, Net Bookings, Gross Profit, and Operating Cash flow for FY20 all at their highest in the last 5 years.

- 80% of the total revenue is digital. This was 16% in 2009.

- Net bookings largely derived from live services across various games such as FIFA’s Ultimate Team (in-game purchases and microtransactions) and monetisation of games.

- $1.66bn free cash flow in FY2020. Predicted $1.45bn in 2021 due to higher cash taxes, higher variable compensation.

- EPS of $10.30

- Gearing ratio of 0.48x

Shortcomings

- Limited growth potential? The current share price is at the very high end of the TTM 52-week range. Having said this, price targets for the next twelve months are $145 (high), $126 (median), and $105 (low). There is a general consensus among analysts that regardless, it should be a buy.


- EA was previously voted twice (2012/13) as the Worst Company in America, due to a history of poor employment conditions and low satisfaction, and consumer upset with its increasingly ‘pay-to-win’ culture and microtransactions in most games. Nevertheless, this title doesn’t judge the way the company is run. The title was given by Consumerist, which measures online consumer satisfaction. The fact that changes have been made to EA employee working conditions, and revenue and sales are consistently growing, this online labelling (which saw it narrowly beat other established and popular companies including Walmart and Bank of America to the title) can be disregarded.


- Competition? To be honest, EA’s main threat is Activision Blizzard, the largest video game company worldwide. However, much of Activision’s revenue comes from its Call of Duty franchise, whereas EA’s is much more diversified, with various popular franchises all playing a role. It is unlikely that any other company will be able to compete with EA when it comes to the sport simulation games (FIFA/Madden) or life simulation games (SIMS).

- EA does not pay a dividend to shareholders. However, it does have a strong share buy-back scheme.

A Personal Story


On a personal level, I’ve bought FIFA games across various devices for the last 16 years, every single year. Even though I don’t particularly have a strong sense of loyalty to EA, nor do I agree with EA’s micro-transaction policy that gives advantages to people with larger wallets, I’ve continued to buy the game every single year based on several reasons:

1. There are no better alternatives. Konami’s Pro Evolution Soccer used to be a better game, but a lack of innovation and development compared to FIFA has made it unpopular. Football Manager (owned by Sega) is also a very popular game, but it is PC-based, and is a lot more tactical (and niche) than FIFA’s massive casual fan base would like.


2. Social. It’s extremely popular among young people – irrespective of age, wealth, etc. At university, a console with FIFA is a staple of a chill night in with friends. At home, for me, on an average evening, the options are to either go to the pub for a pint with friends, or stay in with them and play a FIFA tournament together with a pint.




3. It’s addictive. Lawsuits have been filed claiming that game modes such as Ultimate Team (with their microtransactions) are considered gambling instruments, and studies have shown that it is addictive, like many other video games. Therefore, for as long as I own a Playstation, I’ll continue to buy FIFA each year, however minimal the gameplay changes are on a year-on-year basis.



4. Trading. On a much smaller scale, FIFAs of the past taught me the basic concepts of trading. The Ultimate Team market reflects and mimicks any other buy-and-sell stock market, and, as ridiculous as it is, across social media, individuals have gathered extremely large followings just for being considered ‘pro-traders’ on Ultimate Team.



Closing Thoughts

While the current share price of $138 is very close to its $141 52-week high, analysts have offered a 12-month high estimate of $145 (5% upside) and a median of $126. The general consensus is to buy, and EA has a large growth opportunity. It has proved that it can be resilient in times of uncertainty and recession, and has products that cater to all ages and interests, across an increasingly wide range of devices and platforms. In a survey that I conducted, I found that out of 177 young people (16-25), roughly 70% had bought an EA product before, and 97% would do so in the future. Considering that games such as FIFA, Madden, and Battlefield generally cater more to males (although diversity in content (e.g. women’s international football now on FIFA) has encouraged an increasing female fanbase), and that around half of participants were female, this is quite an impressive statistic.


With a strong balance sheet and lots of cash, proven growth in wider periods of consumer uncertainty and less purchasing power, and continued innovation, development, and an enormous user/fanbase, EA has a lot of going for it. However, there are clearly some fundamental caveats and flaws in the business. After all, a company that has twice been voted the worst business in America must have a lot more going on behind the scenes than most of us are aware of!


Disclaimer:


The Student Investor is not a registered investment, legal or tax advisor or broker/dealer. All opinions expressed by The Student Investor are from the personal research of the author, and are written for educational purposes only. Although best efforts are made to ensure that all information is accurate and up-to-date, occasionally unintended errors and misprints may occur. Please note that the value of your investment can go up or down, and The Student Investor takes no responsibility for any decisions made by readers.

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