Playdemic Is Electronic Arts Fourth Acquisition This Year But Stock Remains Sluggish

[Updated: 6/23/2021] EA To Acquire Playdemic

Electronic Arts (NASDAQ: EA) today announced that it has acquired Warner Bros. Games’ Playdemic for $1.4 billion in cash. Playdemic is a mobile gaming company known for its popular game Golf Clash, which has more than 80 million downloads globally to date. Electronic Arts has been on an acquisition spree, with Playdemic being its fourth major acquisition this year. Earlier this year, the company acquired Codemasters, Metalhead Software, and Glu Mobile.

While the company already had a strong e-sports franchises network, including FIFA, with the Codemasters acquisition it added Formula One, and DiRT among others, to its racing games portfolio that earlier included the Need For Speed franchise. Electronic Arts also acquired Metalhead Software, a Canada-based video game studio, known for its popular Super Mega Baseball franchise. Furthermore, the company acquired Glu Mobile for $2.1 billion, giving it access to popular female-centric games, including Kim Kardashian: Hollywood and Covet Fashion, along with MLB Tap Sports Baseball, another sports addition to the company’s existing portfolio that includes FIFA and Madden NFL, among others. And now with Playdemic, Golf Clash is added to Electronic Arts’ wide portfolio of sports games. The Glu and Playdemic acquisitions will strengthen the company’s mobile business, which currently accounts for just 13% of the company’s total sales.

While these acquisitions appear to be a great fit for Electronic Arts’ long term growth, the investors haven’t rewarded EA stock, given it is up just 1% year-to-date, underperforming the broader markets, with the S&P 500 rising 15%. We continue to believe that EA stock is undervalued at the current levels of around $140. Going by our Electronic Arts Valuation of $170 per share, based on expected EPS of $6.81 and a P/E multiple of 25x for fiscal 2022, there is more than 20% potential upside for EA stock.

[Updated: 5/7/2021] EA Fiscal Q421 Earnings Preview

Electronic Arts (NASDAQ: EA) is scheduled to report its fiscal Q4 2021 results on Tuesday, May 11. We expect the company to likely post revenue and earnings below the consensus estimates. Electronic Arts, in-line with other gaming companies, is likely to benefit from higher gaming engagement levels seen over the recent quarters, bolstering its overall revenue growth. However, the company, in its fiscal Q3 earnings conference call, stated that it expects a 17% y-o-y growth in operating expenses,  and this will likely weigh on the overall earnings growth. While we estimate the company’s results to be below the consensus estimates, our forecast indicates that Electronic Arts’ valuation is $156 per share, which is 11% above the current market price of around $141, implying EA stock still looks attractive. Our interactive dashboard analysis on Electronic Arts Pre-Earnings has additional details.

(1) Revenues expected to be in-line with the consensus estimates

Trefis estimates Electronic Arts’ fiscal Q4 2021 revenues to be around $1.3 billion, below the consensus estimate of $1.4 billion. Despite the economies opening up with vaccination programs underway in multiple countries, the user engagement levels for gaming has so far remained on the higher side. That said, Electronic Arts has had fewer releases in fiscal 2021, compared to the last fiscal. Looking forward, we forecast strong revenue growth for Electronic Arts, aided by its new acquisitions of Codemasters, Glu, and more recently Metalhead Software. Electronic Arts’ fiscal Q3 2021 total bookings (refers to revenue plus change in deferred revenue) were up 19% y-o-y to $2.4 billion, primarily reflecting continued growth in its e-sports franchises. Our dashboard on Electronic Arts Revenues offers more details on the company’s segments.

2) EPS likely to be below the consensus estimates

Electronic Arts’ fiscal Q4 2021 adjusted earnings per share (EPS) is expected to be $1.02 per Trefis analysis, slightly below the consensus estimate of $1.05. The company’s adjusted net income of $892 million in fiscal Q3 2021 reflected a 20% rise from its $742 million figure in the prior-year quarter, primarily due to higher change in deferred revenues. For the fiscal 2021, we expect the adjusted EPS to be higher at $5.55 compared to $4.81 in fiscal 2020.

(3) Stock price estimate 11% above the current market price

Going by our Electronic Arts’ Valuation, with an EPS estimate of $5.55 and a P/E multiple of 28x in 2021, this translates into a price of $156, which is 11% above the current market price of around $141. In fact, at the current market price of $141, EA stock is trading at 25x its 2021 EPS estimate of $5.55, which compares with P/E multiple of 28x for its peer Take Two Interactive and 27x for Zynga, implying EA stock has more room for growth.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year.

[Updated: 3/21/2021] EA Stock Attractive At $131

Going by the valuations, Electronic Arts Stock (NASDAQ: EA) looks attractive at current levels of $131, in our view. EA stock is up only 19% from the pre-Covid levels of $110, slightly outperforming the S&P which has moved 17% since its mid-February 2020 levels of around 3,380, with the resumption of economic activities as lockdowns are gradually lifted and vaccination programs have been initiated in multiple countries. Electronic Arts’ business has gained traction during the pandemic, as people eschewed more public forms of entertainment. EA stock is also up 66% from levels of around $79 seen toward the end of 2018.

Some of the 66% rise of the last two years or so is justified, given the company’s robust fundamentals. Electronic Arts’ total revenue grew 7.5% to $5.5 billion in 2020, as compared to $5.2 billion in 2018. Also, the company maintained its net margins of 26% over the same period, resulting in a 7% growth in net income from $1.3 billion in 2018 to $1.4 billion in 2020, on an adjusted basis. The company’s total shares saw a decline of 5% over the same period, and on a per share basis, adjusted earnings grew 13% to $4.81 in 2020, as compared to $4.25 in 2018. Given the robust performance over the recent years, Electronic Arts’ P/E multiple also expanded, and it will likely see a further rise from the current levels. Our dashboard, ‘What Factors Drove 66% Change In Electronic Arts Stock between 2018 and now?‘, has the underlying numbers.

Electronic Arts’ P/E multiple expanded from 19x in 2018 to 30x in 2020 based on trailing adjusted EPS. While the company’s P/E is at 27x now, it can see an expansion in the near term, led by steady earnings growth. We discuss more in the section below.

So what’s the likely trigger and timing for upside?

Electronic Arts has benefited from strong demand for gaming in 2020, and this trend is likely to continue in the near term. Most of the new player additions during the pandemic are unlikely to leave post pandemic. Furthermore, the company already had a strong e-sports franchises networks, including FIFA, and now with the recent Codemasters acquisition, the company has added Formula One, and DiRT among others, to its racing games portfolio that earlier included the Need For Speed franchise. In addition to the Codemasters, Electronic Arts last month announced the acquisition of Glu Mobile for $2.1 billion. With Glu, Electronic Arts has now access to popular female-centric games, including Kim Kardashian: Hollywood and Covet Fashion, along with MLB Tap Sports Baseball, another sports addition to the company’s existing portfolio that includes FIFA and Madden NFL among others. The Glu acquisition will strengthen the company’s mobile business, which currently accounts for just 13% of the company’s total sales.