Company Overview: Electronic Arts Inc. develops, markets, publishes and distributes games, content and services that can be played by consumers on a range of platforms, which include consoles, personal computers (PCs), mobile phones and tablets. The Company's games and services are based on a portfolio of intellectual property that includes established brands, such as FIFA, Madden NFL, Star Wars, Battlefield, the Sims and Need for Speed. The Company markets and sells its games and services through retail channels and through digital distribution channels. The Company's PC games and additional content can be downloaded directly through its Origin online platform, as well as through third-party online download stores. Its mobile, tablet and PC free-to-download games and additional content are available through third-party application storefronts, such as the Apple Application Store and Google Play.
 

EA Details

Leading Game Provider: Electronic Arts Inc. (NASDAQ: EA) develops and distributes games, content and services, which an individual can play or use on laptops, mobile phones, PCs (personal computers) and tablets. The company has entered into the partnership with third parties for publishing the company’s products in some Asian countries as well as has provided licenses to them for conducting the games. The main competitors for EA are Sony, Disney, Activision Blizzard, Take-Two Interactive Software Inc., etc. EA’s core strategies have continued to deliver award-winning games and services to players and deep player engagement. The company reported excellent numbers in 4QFY19 with healthy growth in top-line which was above the company’s expectation. Going forward, the Management expects FY20 to bring further entertainment to the expanding audience and will continue to the growth of the business.

Decent Financial Performance for the fourth Quarter of 2019 & FY 19: EA posted revenue growth of 8.7% to $1.24 billion for 4QFY19, which was well above the guidance of $75 million by the Management. The strong performance in the 4QFY19 was on the back of Apex Legends, which is a game of battle-royale-style that was launched in February 2019. Apex Legends, an all-new free-to-play battle royale game from Respawn, has been proved to be a bigger hit for the company with quickly reaching the milestone of 50 million players. It has also helped the company to tap into new player audiences, as nearly 30% of Apex Legends players are new to EA. Further, during the fourth quarter of 2019, the company had incurred the operating expenses of $766 million, which was more $51 million as compared to the company’s anticipation. This was due to the company’s marketing investments made for the launch of two major new franchises. Operating income stood at $196 million for the 4QFY19. The company, in the quarter under consideration, has generated the operating cash flow of $599 million, down $16 million from last year. The company incurred the capital expenditures of $35 million and has generated the free cash flow of $564 million in 4QFY19. For the period, the company’s net bookings were $1.36 billion, which is better than the company’s expectation of $1.17 billion, and increased from $1.26 billion in last year. Digital net bookings grew 14% to $1.19 billion during the fourth quarter on the back of strong digital sales of Apex Legends and Anthem. Live services net bookings grew 24% to $845 million, mainly due to the Apex Legends. The Mobile business net bookings declined 23% to $135 million. However, it continues to be a very profitable segment, contributing over 40% towards margin. Full game PC and console downloads’ net bookings grew 10% to $213 million as compared to last year, driven by the launch of Anthem and by the ongoing shift to digital. Moreover, during FY 19, the company’s player base grew to more than 500 million on the back of the company’s top franchises, live services on major platforms and the introduction of new IP that included the big hit game, Apex Legends. During the fourth quarter of 2019, the company had repurchased 3.2 million shares at a cost of $301 million. Overall, at the end of the fourth quarter of 2019, the cash and short-term investments stood at $5.45 billion. Importantly, the company's revenue has grown at a CAGR of ~4% over the period of FY16-FY19. Going forward, the Management expects revenue to record a Y-o-Y growth of ~8.6% in FY20E. With this, we expect the CAGR-growth in revenue for the period FY16-FY20E at 5.2%. Net Bookings witnessed a CAGR growth of 2.7% over the period of FY16-FY19. We expect FY16-FY20E CAGR growth for Net Bookings to come in at 2.8%.


Financial Metrics Growth Trend (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 36.86% of the total shareholding. The Vanguard Group, Inc and T. Rowe Price Associates, Inc. hold the maximum interest in the company at 7.42% and 5.95%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)
 
Key Metrics: The company posted healthy margins in all the quarters of FY19. EBITDA and net margins for 4QFY19 stood at 19.7% and 16.9%, which were well above the industry median of 13.0% and 2.5%, respectively. 4QFY19 ROE for the company at 3.9% also remained above the industry median of 1.1%. It represents that the company generates more returns for the shareholders.
 
 

Key Metrics (Source: Thomson Reuters)
 
Outlook for FY 20: EA does not provide the forecasts on a non-GAAP basis for its financial results and considers the long-term tax rate to be 18%. The company for FY 20, is anticipating the net revenue to be about $5.38 billion. For online-enabled games, the change in deferred net revenue is projected to be about $125 million. Mobile platform fees are projected to be about $150 million in FY20. The company expects the net income for the fiscal 2020 to be approximately $2.6 billion, including a one-time tax benefit of about $1.5 billion. The diluted earnings per share for FY 20 is anticipated to be about $8.56 per share, including the one-time tax benefit of about $5 per share. EA projects the operating cash flow for fiscal year 2020 to be approximately $1.58 billion.  The company estimates the share count of 303 million to calculate FY20 diluted earnings per share. FY20 net bookings are expected to be approximately $5.1 billion. Net bookings from full-game downloads are projected to be down 5% to 10%, driven by product mix, offset by the underlying shift of around five percentage points a year to digital. In the fiscal year 2020, the operating expenses are expected to grow in the very low single-digit percent due to the company’s continuous efforts to control its expenses.

Moreover, for the first quarter of FY20, the company expects the net revenue to be approximately $1.130 billion. For online-enabled games, the change in deferred net revenue in the first quarter of 2020 is projected to be about $405 million. The mobile platform fees for 1QFY20 is expected to be approximately $35 million. The company expects the net income for 1QFY20 to be approximately $1.8 billion, including the one-time tax benefit of about $1.5 billion. EA anticipates the diluted earnings per share for 1QFY20 to be about $5.84 per share, including the one-time tax benefit of about $5 per share. 1QFY20 diluted earnings per share are calculated on the share count of 302 million. However, if EA incurs the loss in 1Q, the company’s 1QFY20 earnings per share will be calculated on the basic share count of 299 million. For the first quarter fiscal year 2020, the company expects the net bookings to be approximately $690 million. Additionally, EA anticipates the net bookings from its game Apex Legends for the fiscal year 2020 to be in the range of $300 million to $400 million. Meanwhile, EA has expanded its EA Access subscription service to Sony’s PlayStation 4, which will start from July. The company expects to sell the new Need for Speed title approximately 4 million units in fiscal year 2020. These projections reflect in-line performance as compared to the past performance of the franchise. The company also projects to sell the upcoming Plants versus Zombies shooter in the low-single-digit millions in FY 2020. The net bookings for packaged goods and others are projected to decline by 4% (year-on-year) to be approximately $1.2 billion, on the back of the company’s shift to digital. Digital net bookings are expected to grow by 6% (year-on-year) to $3.9 billion in fiscal year 2020. Furthermore, in the digital net bookings, the company projects the live services to grow in the range of 10% to 15%, due to the expected growth of Apex Legends, FIFA Ultimate Team and the Sims 4. The company expects that from second quarter 2020 onwards, FIFA Online will start growing on a year-on-year basis. In mobile business, the company plans to start early user testing for 2 new mobile games, later in 2019. EA has not projected any net bookings from the new mobile games in fiscal 2020. Therefore, the company expects the mobile business to decline by approximately 10% to 15% in fiscal year 2020. In addition, EA plans to launch sports games, that will comprise of a racing game, an action title and a first-person shooter. The company also plans to add more than 20 different content drops for the Sims 4.


FY20 Guidance (Source: Company Reports)
 

Key Valuation Metrics (Source: Thomson Reuters)
 
Valuation Methodology:

Method 1: Price to Earnings Multiple Approach (NTM):

Price/Earnings Based Valuation (Source: Thomson Reuters), *NTM-Next Twelve Months

Method 2: EV/EBITDA Multiple Approach (NTM):

EV/EBITDA Based Valuation (Source: Thomson Reuters), *NTM-Next Twelve Months

Method 3: Price to Book value Multiple Approach (NTM):

Price-to-Book Value Based Valuation (Source: Thomson Reuters), *NTM-Next Twelve Month

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: The stock is trading at a price of $95.25, has support at $89.2 level and resistance at ~$109. The company posted excellent results for the fourth quarter of 2019 on the back of strong performance witnessed by game Apex Legends which proved to be a bigger hit than the company’s expectation. By looking at its strong fundamentals and financial performance in FY19, product offerings, and outlook along with the stable guidance, we have valued the stock using the three relative valuation methods, P/E , EV/EBITDA, and P/BV multiple and arrived at the target price in the ambit of $101 to $109.5 (single digit upside (%)). Hence, we recommend a “Buy” rating on the stock at the current market price of $95.25 per share (up, 1.19% on 5 June 2019).
 
 
EA Daily Chart (Source: Thomson Reuters)

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