Electronic Arts (NYSE: EA) has risen over 25% from levels of $130 in early 2022 to $160 now, aligning with the performance of the S&P 500 index over this period. The company has seen a solid sales growth over the recent years, despite tepid consumer spending. For perspective, the U.S. total video games sales in 2023 was $57.2 billion, reflecting only a small 1% y-o-y growth. [1] Now, this 25% growth for EA stock since early 2022 can be attributed to:
- a 30% rise in the company’s revenues from $5.6 billion in fiscal 2021 (fiscal ends in March) to $7.3 billion now;
- a 7% decline in total shares, thanks to around $5 billion the company spent on share repurchases; partly offset by
- an 11% fall in the stock’s P/S ratio from 6.8x then to 6.0x now, partly due to lower gaming demand.
Electronic Arts’ revenue growth was driven by its live services offering, primarily for the FIFA franchise. Furthermore, the company has benefited from acquisitions over the recent years. Not only did Electronic Arts see its revenue rise, its reported operating margin improved to 20.9% in fiscal 2024, compared to 18.6% in 2021. Furthermore, the company has a solid financial position, with its debt to equity ratio of 4.5% and cash as a percentage of assets of 24.3%, implying a low financial risk.
However, the revenue growth was just 2% in fiscal 2024, owing to a broader decline in gaming demand. The average quarterly playtime has seen a significant 26% fall between 2021 and 2023. [2] Looking at the latest quarter, Electronic Arts reported total bookings of $2.1 billion, up 14% y-o-y in Q2’25. The bottom line stood at $2.15 per share, versus $1.46 in the prior-year quarter. The rise in sales can primarily be attributed to higher demand for its sports games and The Sims. The company expects net bookings of $7.5 billion to $7.8 billion in fiscal 2025.
Now, EA stock is up 20% this year, versus a 25% rise for the broader S&P 500 index. Even if we look at a slightly longer period, returns for EA stock were far from consistent, although annual returns were considerably less volatile than the S&P 500. Returns for the stock were -8% in 2021, -7% in 2022, and 13% in 2023. Similarly, the Trefis High Quality Portfolio, with a collection of 30 stocks, is less volatile. And it 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 around rate cuts, 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 strong jump? From a valuation perspective, we think EA stock is fairly priced. We estimate Electronic Arts’ Valuation to be $165 per share, aligning with its current market price. Our forecast is based on 21x forward expected earnings of $7.79 for EA in 2025. The 21x figure aligns with the stock’s average P/E ratio over the last five years. We think sports franchises for Electronic Arts will continue to drive its sales growth, along with The Sims. However, we don’t see a reason to raise our valuation multiple. Investors willing to pick EA stock will likely be better off waiting for a dip, in our view.
While EA stock looks like it is appropriately priced, 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.
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