Battlefield Labs Will Refine Gameplay Through Community Engagement Before FY '26 Launch

Key Takeaways

• Expansion into American football and innovative FC platform features aim to boost player engagement and sustain long-term revenue growth.
  
• AI and technological unification efforts target operational efficiency, enhancing product releases and potentially driving higher profitability.
  
• Declines in key franchises and operational challenges threaten revenue growth, player engagement, and financial stability at Electronic Arts.

Catalysts

Develops, markets, publishes, and delivers games, content, and services for game consoles, PCs, mobile phones, and tablets worldwide.

• Electronic Arts plans to expand its American football ecosystem with new offerings, such as College Football 26, which is set to launch in the summer. This expansion is expected to significantly drive player engagement and revenue growth in FY '26.
  
• EA is developing new modalities of play and social connectivity within the FC platform, which includes introducing groundbreaking gameplay and cutting-edge tools for content creation. These innovations are aimed at increasing player engagement and sustaining long-term revenue growth.
  
• The acquisition of TRACAB technologies allows EA to integrate advanced sports tracking and data capture technology, enhancing the realism and engagement of its sports games, potentially driving higher player retention and recurrent revenue through live services.
  
• EA is taking a modern approach with Battlefield Labs, involving a more dynamic development cycle and community engagement to refine gameplay before launch. This can lead to a stronger product release, which might help boost revenue and profitability when the game launches in FY '26.
  
• EA's initiatives to unify its central technology functions under a CTO and leverage AI for game development signal a strategic move towards increased operational efficiency and innovation, likely improving net margins and long-term earnings growth.

Electronic Arts Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Electronic Arts's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.3% today to 18.2% in 3 years time.
• Analysts expect earnings to reach $1.5 billion (and earnings per share of $5.86) by about March 2028, up from $1.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.7 billion in earnings, and the most bearish expecting $1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.1x on those 2028 earnings, down from 35.2x today. This future PE is greater than the current PE for the US Entertainment industry at 26.0x.
• Analysts expect the number of shares outstanding to decline by 2.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.02%, as per the Simply Wall St company report.

Electronic Arts Future Earnings Per Share Growth

Risks

• Dragon Age underperformed due to competitive dynamics in the single-player RPG market, which could negatively impact revenue from new releases.
  
• EA Sports FC experienced a decline in net bookings due to soft acquisition and lower engagement, adversely affecting the revenue growth of one of their major franchises.
  
• Structural issues with player engagement in FC led to underperformance, signaling potential challenges in sustaining player interest, which may impact future revenue and profit projections.
  
• Apex Legends saw year-over-year declines, suggesting potential difficulties in maintaining its player base and revenue.
  
• Operating cash flow was down 7% year-over-year, indicating possible challenges in cost management and cash generation, which could impact net margins and financial stability.

Valuation

• The analysts have a consensus price target of $143.514 for Electronic Arts based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $179.0, and the most bearish reporting a price target of just $125.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.1 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 30.1x, assuming you use a discount rate of 8.0%.
• Given the current share price of $141.87, the analyst price target of $143.51 is 1.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.