Electronic Arts delivered middling earnings and a revenue beat, which investors apparently approve of enough to send the stock higher by 5 percent in after-hours trading.
With the gaming industry constantly going through changes, it’s critical to stay on top of what the numbers say and mean in order to avoid getting caught in an unexpected downdraft.
Earnings Were Good but Not Great
There was plenty of good news coming out of Electronic Arts.
For the quarter, digital net revenue grew by 10 percent, cracking the $1 billion mark by bringing in $1.049 billion in revenue. Other revenue fell by $20 million to $160 million.
Net income, after backing out a positive tax effect, grew very modestly to $299 million from $293 million last year. Operating cash came in at $158 million, up more than 20 percent from last year’s $120 million.
Digital net bookings for the trailing 12 months increased 5 percent to $3.730 billion. Digital now represents three-quarters of Electronic Arts’ total bookings.
Total revenue grew about 5 percent to just over $5 billion, while net income grew strongly from $692 million to $927 million.
Electronic Arts is a cash flow monster, pushing out $1.585 billion over the past year.
The one, the only, Zizou ? ? On the cover of the #FIFA20 Ultimate Edition and in #FUT20 as an ICON ?
Pre-Order the Ultimate Edition by August 5 to get a guaranteed #OTW player -> https://t.co/kNhJMf0Pmv pic.twitter.com/DNbkzNQxHT
— EA SPORTS FIFA (@EASPORTSFIFA) July 30, 2019
Some Games Are Killing It
Electronic Arts’ games are doing very well. “FIFA Ultimate Team” sported 3 million daily players during the Team of the Season event. The popular “The Sims 4” expansion and game packs grew by 55 percent. “Star Wars: Galaxy of Heroes” now boasts 80 million players.
Gaming stocks are tricky beasts. Games tend to either hit big or not really hit at all. It is certainly a hit-driven business, and now with digital technology, a game can gobble up lots of players and generate recurring revenue in a way it never could before.
Online competitions like Fortnite enhance this approach. Epic Games is a major competitor.
That means future guidance has much more value than it used to.
Electronic Arts believes that Q2 will look as follows:
- $1.315 billion in revenue and net income around $146 million, after backing out tax benefits. That translates to about $0.52 earnings per share.
For the year, Electronic Arts expects $5.375 billion in revenue, net income of $1.095 billion, and $3.61 in earnings per share.
Criticisms of EA
One of the criticisms of EA is that the company relies on sequels as opposed to generating new and interesting original content. EA has moved to digital, but the move away from consoles was too slow.
The growth rates in mobile gaming are in the 10 percent range, yet console growth is barely cracking three percent. As a result, EA has needlessly ceded market share to competitors like Zynga.
Should a non-gamer consider buying stock in EA or other gaming stocks? I would be very cautious about doing so. The reasons are similar in regards to buying media companies, such as AMC Networks.
EA stock has been erratic and is well off its all-time high:
Investors should understand the culture of gamers as well as how good the content is before making the plunge. What may be fascinating to non-gamers may be uninteresting to hardcore gamers, who could easily tank a company by moving on to competitors’ offerings.
Disclaimer: This article is intended for informational purposes only and should not be taken as investment advice.