What’s Next For Electronic Arts Stock After Over 15% Rise In A Year?

Electronic Arts stock (NYSE: EA) trades at around $130, similar to levels seen in late 2021. This compares with an increase of about 10% for the S&P 500 over this roughly two-year period. This underperformance of EA stock can primarily be attributed to a 33% cut in its P/S ratio to 4.6x now, versus 7x in 2021. The valuation multiple has been weighed down due to weakening consumer spending, impacting its game bookings’ growth. Furthermore, expenses are on the rise, and stiff competition in the industry is adding to the woes. This has also resulted in recent layoffs across the major gaming companies. Our dashboard — Why Electronic Arts Stock Moved — has more details.

Now, the decrease in EA stock has been far from consistent. Returns for the stock were -8% in 2021, -7% in 2022, and 12% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that EA underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Communication Services sector including GOOG, META, and NFLX, and even for the megacap 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 each year over 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 elevated interest rates, could EA face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a recovery? We think EA stock will likely see higher levels over time.

Electronic Arts’ revenue of $7.7 billion over the last twelve months reflects a 38% rise from $5.5 billion in 2020. This can be attributed to a continued uptick in live services and strong demand for its E-Sports games, including FIFA and Madden NFL, Also, the company has benefited from its 2021 acquisitions of Playdemic, Codemasters, Metalhead Software, and Glu Mobile. However, lately, the bookings’ growth has slowed due to a weak consumer spending environment. There is increased competition from Take Two Interactive and Activision Blizzard (now part of Microsoft).

Electronic Arts’ operating margin declined by 565 bps to 20.5% now, versus 26.2% in 2020. It saw its total shares outstanding decline by 9%, driven by share repurchases of over $3 billion over this period. This led to earnings expanding from $4.81 in 2020 to $6.47 in 2023, on a per share and adjusted basis. Looking forward, Electronic Arts expects its revenue and bookings to be between $7.3 billion and $7.7 billion in 2024. It expects its adjusted EPS to be in the range of $6.80 and $7.30.

We estimate Electronic Arts’ Valuation to be $151 per share, reflecting a 14% upside from its current price of around $132. Our forecast is based on a little over 21x P/E multiple for EA and expected earnings of $7.11 on a per-share and adjusted basis for the full fiscal 2024. The 21x P/E ratio aligns with the stock’s average over the last four years.

While EA stock looks like it can see higher levels, it is helpful to see how Electronic Arts’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 3/21/2024
[2] Cumulative total returns since the end of 2016

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