Electronic Arts (NYSE: EA ) reported its Q2 fiscal 2024 results earlier this month (fiscals end in March), with revenue and earnings beating street estimates, but we believe EA stock is fully valued, as discussed below. The company reported total reserves of $1.82 billion and adjusted earnings of $1.46 per share compared to the consensus estimates of $1.77 billion in sales and $1.27 earnings per share. In this note, we discuss Electronic Arts’ stock performance, key takeaways from its recent results and valuation.
EA stock has seen little change, moving slightly from levels of $145 in early January 2021 to around $135 now, versus a rise of around 20% for the S&P 500 over this roughly 3-year period. Overall, the performance of EA stock with respect to the index was lackluster. Returns for the stock were -8% in 2021, -7% in 2022, and 10% in 2023 (YTD). By comparison, returns for the S&P 500 were 27% in 2021, -19% in 2022, and 18% in 2023 (YTD) – indicating that EA underperformed the S&P in 2021 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – it’s been tough over the past few years for individual stocks; for heavyweights in the Communications Services sector, including GOOG, META and NFLX, and even for the mega-cap stars TSLA, MSFT and AMZN.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 every year during the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and high interest rates, could EA face a similar situation as it did in 2021 and 2023 and underperforms the S&P over the next 12 months – or will it see a sharp jump? From a valuation perspective, EA stock looks appropriately priced. We value Electronic Arts rating to be $146 per share, reflecting only 8% upside from its current price of around $135. Our forecast is based on a slightly over 20x P/E multiple for EA and expected earnings of $7.12 on a per-share and adjusted basis for the full fiscal 2024. The 20x P/E ratio is in line with the stock’s last five-year average. The company expects its adjusted earnings to be in the range of $4.10 and $4.66 per share in 2024.
Electronic Arts’ revenue of $1.9 billion in Q2 was flat, but its total bookings of $1.8 billion grew 4%, driven by the launch of FC24 and continued growth in the Madden NFL and FIFA franchises. Electronic Arts’ adjusted profit of $398 million in Q2’24 reflected a 1.5% decline from its $404 million profit figure in the previous quarter. The company’s operating margin decreased 270 bps to 19.7%. Adjusted earnings of $1.47 per share were marginally higher than the $1.45 figure in the previous quarter, partly due to a 2.5% drop in total shares outstanding.
Looking forward, Electronic Arts should continue to benefit from its live service offering, primarily for the FIFA franchise. In addition, the company benefited from its 2021 acquisitions of Playdemic, Codemasters, Metalhead Software and Glu Mobile, a trend expected to continue in the near term. Electronic Arts expects its revenue and reserves to be between $7.3 billion and $7.7 billion in 2024.
While EA stock looks appropriately priced, it’s useful to see how Companions of Electronic Arts rate on metrics that matter. You’ll find other valuable comparisons for companies across industries at Peer Comparisons.
returns | Nov 2023 MTD (1) |
2023 YTD (1) |
2017-23 Total (2) |
EA Return | 9% | 10% | 71% |
S&P 500 Return | 7% | 17% | 101% |
Hit Enhanced Value Portfolio | 7% | 26% | 550% |
(1) Month and year-to-date from 11/16/2023
(2) Cumulative total profit since the end of 2016
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.