EA's Tactical Moves In Online Communities And eSports Events Set To Ignite Revenue And Engagement

Key Takeaways

• Expansion in online communities and partnerships with major sports events are poised to significantly boost fan engagement and financial performance.
  
• Investments in AI and machine learning for game development, alongside a robust stock repurchase program, reflect a strong focus on innovation and shareholder value.
  
• EA faces financial risks from actor strikes, changing gaming preferences, reliance on sports franchises, unpredictable live service revenue, and rising development costs.

Catalysts

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

• Driven by high expectations for revenue growth from strategic priorities like expanding massive online communities, improving engagement with blockbuster storytelling, and leveraging community connections around games, influencing both revenue and net bookings.
  
• Securing and expanding partnerships with sports leagues and events such as UEFA EURO 2024 and CONMEBOL Copa América 2024, expected to boost monetization and fan engagement, impacting revenue positively.
  
• Commitment to investing in technology and innovation, as highlighted by the development and successful launch of EA SPORTS College Football 25, utilizing AI and machine learning to enhance game development efficiency, positively affecting margins by reducing costs.
  
• Focused execution on live service games like Apex Legends and rolling out content updates for The Sims franchise to rejuvenate growth, aiming at increasing user engagement and spending, impacting net bookings and revenue.
  
• Enhanced stock repurchase program to return $5 billion over the next three years, indicating confidence in future growth and financial health, aimed at increasing shareholder value and EPS.

Assumptions

• Analysts are assuming Electronic Arts's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.8% today to 19.4% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $6.15) by about August 2027, up from $1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.9 billion in earnings, and the most bearish expecting $1.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.1x on those 2027 earnings, down from 33.5x today. This future PE is greater than the current PE for the US Entertainment industry at 21.8x.
• Analysts expect the number of shares outstanding to decline by 2.91% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.02%, as per the Simply Wall St company report.

Risks

• The ongoing video game actor strike, if unresolved, could potentially delay game releases or impact the quality of upcoming titles, affecting future revenues and growth prospects.
  
• Increasing competition and a shift in consumer preferences toward free-to-play and mobile gaming may challenge EA's premium game sales and traditional revenue models, possibly impacting net margins.
  
• The reliance on major sports franchise releases for revenue growth carries the risk of market saturation or declining interest in sports games, which could affect net bookings and earnings.
  
• Changes in player engagement and spending patterns within live service games like Apex Legends could lead to unpredictability in recurring revenue streams, impacting long-term financial stability and cash flow.
  
• The necessity to continuously innovate and invest heavily in game development, particularly using AI and machine learning, indicates rising operating costs that could squeeze operating margins if not managed efficiently.

Valuation

• The analysts have a consensus price target of $159.71 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 $183.0, and the most bearish reporting a price target of just $140.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $8.6 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 28.1x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $145.73, the analyst's price target of $159.71 is 8.8% 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.