Electronic Arts: A Hold For Investors In The Gaming Arena

6 min readDec 10, 2023

Investment Thesis

Electronic Arts, Inc. (EA) has solid fundamentals and a competitive standing within the market. However, considering the company’s current valuation in conjunction with the inherent challenges posed by an intensely competitive industry landscape, as well as its dependence on a select group of flagship franchises, I am initiating my coverage on EA at a “Hold”. While I do believe EA is a solid business overall, it currently does not present a compelling opportunity for significant capital appreciation, and it’s best to wait for a better entry point.

Company Overview

Electronic Arts is one of the world’s largest third-party video game publishers and developers, with a diverse portfolio of games across various genres, platforms, and regions. The company’s core operations can be divided into two main segments:

Full game: This includes the initial sale of game titles through physical or digital channels. EA releases new versions of its flagship franchises annually or biennially, as well as new intellectual properties (IPs) and licensed games. EA’s full game segment accounted for 30% of its net revenue in FY2023.
Live services: This includes the recurring revenue from in-game purchases, downloadable content (DLC), expansions, microtransactions, subscriptions, and advertising. EA offers live services for its games, such as content updates, events, challenges, and online multiplayer modes. EA also operates its own digital platform, EA Play, which offers access to a library of EA games and exclusive benefits for a monthly or annual fee. EA’s live services segment accounted for 70% of its net revenue in FY2023.

EA’s target customers include casual and hardcore gamers, sports fans, and mobile users, who access EA’s games through digital downloads, physical discs, online subscriptions, and in-game purchases. EA distributes its games through its own platforms, such as their EA Desktop client, and their EA Play subscription service, as well as through third-party platforms, such as Steam, PlayStation, Xbox, Nintendo, and Apple.

EA’s competitive advantage lies in its strong franchise portfolio, which includes some of the most popular and recognizable brands in the gaming industry such as:

EA Sports FC: Launched in October 2023, this title quickly surpassed FIFA 23’s lifetime sales, amassing 200 million players and $1.2 billion in net bookings for Q2 2024.
Madden NFL 24: Released in 2024, the game attracted 10 million players and achieved $500 million in net bookings for Q2 2024.
Apex Legends: Expanding to China and Japan, this battle royale game reached 100 million players and generated $600 million in net bookings in Q2 2024.
The Sims 4: With over 70 million players worldwide, including mobile versions, this life simulation franchise garnered $400 million in net bookings for Q2 2024.
F1 23: The latest in EA’s racing simulation series, it achieved the franchise’s highest net bookings in Q1 and reached 5 million players and $200 million in net bookings for Q2 2024.

Industry Overview

The video game industry is expected to reach revenue of US$249.60 billion in 2023, growing at an annual rate of 9.83% between 2023 and 2027. The industry is resilient to economic downturns, as video games provide a relatively cheap and accessible form of entertainment and escapism for consumers.

The video game industry is highly competitive and fragmented, with a few large players dominating the market and many independent and niche developers and publishers.

Financials

Q2 2024 Results

According to EA’s latest quarterly report, the company’s net revenue for the second quarter of fiscal year 2024 was $1.914 billion, up 0.5% year-over-year. The breakdown of revenue by source was as follows:

Game sales: $621 million, up 3% YoY
Live Services: $1.293 billion, down 0.7% YoY
Net Bookings: $1.820 billion, up 4% YoY

The company’s net income for the quarter was $399 million, up 33% year-over-year, and its diluted earnings per share was $1.47, up 37% year-over-year. The company’s operating cash flow for the quarter was $112 million, and its free cash flow was $72 million.

Historical/Trailing Results

Key financials for EA for the past five fiscal years are as follows:

Below is a comparison of EA trailing metrics vs the industry and 5Y historical values:

Valuation

I conducted a comprehensive valuation of EA using both relative and intrinsic methods. For the relative valuation, I selected a peer group based on their business model alignment, intellectual property similarities, and player demographic overlap. The peer group included Microsoft Corporation (MSFT), Sony Group Corporation (SONY), Take-Two Interactive Software, Inc. (TTWO), Nintendo Co., Ltd. (NTDOY), Capcom Co., Ltd. (CCOEY), Ubisoft Entertainment SA (UBSFY), and Konami Group Corporation (KONMY). After evaluating four key metrics (EV/Revenue, EV/EBITDA, P/S, and P/E) on both trailing and forward-looking bases, I concluded that EA’s valuation ranged from fair to slightly overvalued, leading me to maintain a ‘Hold’ position on EA.

The relative assessment against these peers led me to maintain a ‘Hold’ position on EA. My analysis utilized four key metrics: EV/Revenue, EV/EBITDA, P/S, and P/E, evaluated on both trailing and forward-looking bases. This comparison indicated a valuation range from fair to slightly overvalued.

For the intrinsic valuation, I used a Discounted Cash Flow (DCF) model, incorporating consensus forecasts with adjustments based on our analysis. I used historical average common-size metrics for more predictable financial items and calculated the terminal value using two exit multiple approaches (EV/Revenue and EV/EBITDA) derived from the median of the peer group. The DCF valuation indicated minimal upside potential for EA, with exit multiples at 8.47% for EV/Revenue and 2.88% for EV/EBITDA. These findings corroborated the relative valuation’s implications and solidified my stance on EA.

Risks & Challenges

Regulation of In-Game Revenue Practices: EA’s in-game revenue practices, especially those involving loot boxes, have been subject to scrutiny and criticism from various stakeholders. Ethical and legal issues have been raised about the potential harms of loot boxes, with several countries, such as Belgium, the Netherlands, France, Germany, and the UK, taken or considered taking regulatory actions against loot boxes, such as banning them, restricting them, or requiring disclosure of their odds.

Heavy Reliance on Key Franchises: Key franchises, such as FIFA, Madden NFL, and Star Wars, represent a significant portion of EA’s revenues and profits. These franchises may face declining popularity, quality, or innovation over time, or may lose their licensing agreements or exclusivity rights. EA may also face difficulties in creating new successful franchises or expanding its existing ones to new markets or segments.

Negative Reputation in the Gaming Community: EA has faced criticism for its business practices, including aggressive monetization strategies, loot boxes, and microtransactions. This has led to negative sentiment and a tarnished reputation among some segments of the gaming community, potentially impacting player trust and loyalty.

Conclusion

EA is a significant player in the global video game industry, with a robust portfolio of successful franchises and a strong position in both full game sales and live services. However, the company’s current market valuation and the highly competitive nature of the industry present a complex scenario for investors. While EA demonstrates solid fundamentals and potential for continued success, particularly in its diverse offerings and expansion into key markets, the challenges it faces cannot be overlooked. Therefore, I recommend a “Hold” position on EA.