Electronics Art Inc- BUY recommendation
Price $US 121.51 Price Target $US 146.00
Recently an analyst commissioned by LemSec reviewed Electronic Arts with a BUY recommendation for those investors seeking to increase exposure to gaming and technology. At the time of writing the price was $121.51 and it is currently trading at $US131.41 (23/3/2021).
We have summarised the analyst’s report here but if interested, would be delighted to forward a more detailed report to interested investors.
So what does Electronics Art Inc do?
Electronic Arts (EA), listed on the Nasdaq, is a leading digital interactive entertainment company. With stellar gaming brands globally, EA has greater than 300 million registered players around the globe. Such brands Madden NFL, EA SPORTS FIFA, The Sims and Need for Speed as well as trademarks for Apex Legends, Anthem, Battlefield, Dragon Age, and Plants vs. Zombies.
Underpinning a BUY recommendation…
- Strong core global franchises as noted above with growing popularity in Esports.
- Attractive long-term drivers in online gaming with expectations to achieve major growth in new games, new geographic regions and more creative ways of engaging.
- An example of a new product release is Apex Legends. With the addition of mobile, management believes Apex is on track to be a billion dollar franchise by end of FY21. (Net book grew 24% during the first quarter).
- Existing Play subscription service reached 6.5 million paid subscribers, with further boost expected as the service goes live on Microsoft Game Pass. Management believes it can double the subscriber base over the next 12 months.
- The next-gen console cycle provides a near and medium-term boost with the emergence of 5G taking cloud gaming into the mainstream.
Andrew Wilson (CEO & Director) noted on the analyst conference call, “As each previous console generation has grown in the global market, we expect the transition to PS5 and Xbox series X to be the same and be a major growth driver for EA for FY22 and beyond…we plan to launch at least 6 new games on the next-gen consoles in FY22, including a new Need for Speed and next Battlefield game being created by DICE and technical advancements of the new consoles will allow us to deliver a true next-gen vision for the games…EA SPORTS will be executing on a significant expansion that will span new games, more geographies and more ways to engage.”
- The Company is transitioning towards a higher margin digital-first model (56% of units sold on Xbox One and PlayStation 4 over the last 12 months are now digital rather than physical) which is supported by spending shifts toward in-game purchases and subscription services.
- Mobile advertising presents significant opportunity (though not without execution risk).
- Solid free cash flow generation (12 month cash flow of $2.04bn) and strong balance sheet with short term investments up +24% YOY.
- There is ample room to support capital management initiatives (such as a share buyback with authorisation for $2.6bn over two years).
- Cash flow performance led to the Board instating its first dividend of 17cps.
Considerations before buying…
- EA delivered weak 2Q21 results (albeit above management’s guidance), primarily due to a drag on net bookings amid launch timings of NFL 21 and FIFA 21 and a slowdown in live services growth as the virus-induced social-distancing boost to demand started to fade.
- New competition and new product release from existing competitors could impact EA’s growth rate.
- Key franchises or new product releases fail to attract gamers or meet investor growth expectations.
- Cloud gaming could be disruptive for incumbents.
- Adverse regulatory changes.
- Concentration of revenue / earnings to a small group of games.
- Disruption to mobile growth (e.g. growth in smart glasses displaces smartphones).
- Loss of content licensing agreements with owners (FIFA, NFL).
What’s next?
Please contact one of our advisers if you would like assistance in optimising your trading outcome in Electronic Art Inc.