Electronic Arts (NASDAQ:EA) is an excellent combination of good value and strong growth tech stock. Electronic Arts will benefit from the launch of the two next generation sports games Madden 15 and FIFA 15, and from its partnership with Microsoft to deliver EA Access, an all-new monthly membership for gamers exclusively on Xbox One. EA's stock has surged strongly since the start of 2013, gaining an impressive 159%. Nevertheless, in my opinion, EA's stock still has plenty of room to move up. Electronic Arts has compelling valuation metrics and strong earnings growth prospects; its PEG ratio is very low at 0.80. Moreover, Electronic Arts has been able to show an earnings per share surprise in each one of the last four quarters.
According to the company, Electronic Arts is a leading global interactive entertainment software company. EA delivers games, content and online services for Internet-connected consoles, personal computers, mobile phones and tablets. The company was founded in 1982 and is headquartered in Redwood City, California.
Source: Electronic Arts
The table below presents the valuation metrics of EA, the data were taken from Yahoo Finance and finviz.com.
Electronic Arts' valuation metrics are very good; the price-to-free-cash-flow is very low at 13.51, and the average annual earnings growth estimates for the next five years is very high at 24.33%. The PEG ratio is extremely low at 0.80. The PEG Ratio - price/earnings-to-growth ratio - is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.
Latest Quarter Results
On July 22, Electronic Arts reported its first-quarter fiscal 2015 financial results, which beat EPS expectations by $0.23 and beat on revenue.
Source: Q1 FY15 Slide Presentation
In the report, Chief Executive Officer Andrew Wilson said:
It was a strong start to the year for Electronic Arts. We are committed to putting our players first and delivering the entertainment, innovation and creativity that our players want. Through exciting new titles and fresh content in our live services, we are well-positioned to deliver on that commitment in FY15 and beyond.
Also in the report, Chief Financial Officer Blake Jorgensen said:
EA delivered first quarter EPS above prior year and our guidance through a combination of revenue growth, higher gross margins and lower operating expenses. We have gotten off to a great start and are encouraged by the trends in our industry and business.
Dividend and Share Repurchase
Electronic Arts is not paying dividends, however it has a share buyback program.
EA repurchased 1.4 million shares in Q1 for $50 million pursuant to the $750 million share repurchase program initiated in May 2014.
A comparison of key fundamental data between Electronic Arts and its main competitors is shown in the table below.
Source: Yahoo Finance, finviz.com
EA has the lowest debt-to-equity ratio, and the lowest PEG ratio among the stocks in the group. However, its EV/EBITDA is the highest (see also my article about ATVI).
The charts below give some technical analysis information.
The EA stock price is 5.67% above its 20-day simple moving average, 3.90% above its 50-day simple moving average and 26.35% above its 200-day simple moving average. That indicates a short-term, mid-term and a long-term strong uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at -0.13 and ascending, which is a positive signal (a rising MACD histogram that is crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 62.68 which do not indicate oversold or overbought conditions.
According to Portfolio123's "All-Stars: Zweig" powerful ranking system EA's stock is ranked first among all S&P 500 tech stocks. The "All-Stars: Zweig" ranking system is based on investing principles of the well-known investor, Martin Zweig. The ranking system is quite complex, and it is taking into account many factors like; EPS Growth, Sales Growth, Market Performance and Insider activity, as shown in the Portfolio123's chart below.
Back-testing over fifteen years has proved that this ranking system is very useful.
Many analysts are covering the stock, and most them recommend it. Among the Twenty-six analysts, six rate it as a Strong Buy, eight rate it as a Buy, and twelve analysts rate it as a Hold.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering EA stock there are fifteen analysts who have the four or five star rating, ten of them recommend the stock, and five analysts rate it as a Hold.
On August 26, Electronic Arts officially launched Madden NFL 15 on Xbox One, the all-in-one entertainment system from Microsoft, and the PlayStation®4 computer entertainment system. Madden NFL 15 allows fans to own their rival with a new arsenal of defensive pass rush moves and tackling mechanics, as well as a new and improved playcalling system. The game also showcases the most impressive visuals in franchise history, and a comprehensive Skills Trainer that teaches not only game skills, but football strategy as well.
The launch of Electronic Arts flagship sports franchise Madden NFL 15 has generated intense interest. According to CNBC, it is breaking records, not for game play, but for views of its promotional video. A three and a half minute spot starring comedian Kevin Hart, actor Dave Franco, and a couple of NFL stars, has been viewed over 21 million times on Facebook (NASDAQ:FB) and YouTube since it was released a week ago Friday. EA hopes that the 26th installment of the franchise will benefit from the new generation consoles. Increasingly EA is counting on Madden not just for game sales, but also digital revenue. The company's cloud-based Fantasy Football League, Madden Ultimate Team, grew 350 percent year-over-year.
On July 29, Electronic Arts revealed a new way for gamers to play more EA games. The company have partnered with Microsoft to deliver EA Access, an all-new monthly (or annual) membership for gamers exclusively on Xbox One that starts at just $4.99 a month. The service is being rolled out in beta to a limited number of players, but it will launch for everyone on Xbox One soon.
During the first-quarter conference call, management announced delays in two major game releases: Battlefield Hardline and Dragon Age: Inquisition. EA initially planned to release Battlefield Hardline in October, though this has now been pushed back to the March 2015 quarter, after the prime 2014 holiday selling season.
Electronic Arts has been able to show an earnings per share surprise in each one of the last four quarters, as shown in the table below.
In my opinion, the fact that the company succeeds to beat analyst expectations quarter after quarter demonstrates the strength of its business, and there is a good chance that Electronic Arts will continue to surprise by reporting better than estimate results also in the future.
EA's stock has significantly outperformed the market this year and in 2013. Since the start of the year, EA's stock has gained 63.7% while the S&P 500 index has risen 8.2%, and the Nasdaq Composite Index has increased 9.4%. Moreover, since the beginning of 2013 EA's stock has recorded an impressive gain of 158.7%, while the S&P 500 index has increased 40.2%, and the Nasdaq Composite Index has risen 51.4%. Nevertheless, considering its compelling valuation metrics and strong earnings growth prospects, the stock, in my opinion, still has room to move up.
In my opinion, Although Electronic Arts announced delays in two major game releases, it will achieve strong sales this fall from the two next generation sports games. EA is missing the holiday shopping season with two major games while its rival Activision Blizzard has recently launched three of the most anticipated titles. However, EA's Madden 15 and FIFA 15 released for next generation consoles Sony PlayStation 4 and Xbox One will attract new console owners.
I also expect that the recently announced partnership with Microsoft to deliver EA Access, an all-new monthly (or annual) membership for gamers exclusively on Xbox One that starts at just $4.99 a month, will contribute to further growth in revenues.
Electronic Arts will benefit from the launch of the two next generation sports games Madden 15 and FIFA 15, and from its partnership with Microsoft to deliver EA Access, an all-new monthly membership for gamers exclusively on Xbox One. Electronic Arts has compelling valuation metrics and strong earnings growth prospects; its PEG ratio is very low at 0.80. Moreover, EA's stock is ranked first among all S&P 500 tech stocks, according to Portfolio123's "All-Stars: Zweig" powerful ranking system. In addition, Electronic Arts has been able to show an earnings per share surprise in each one of the last four quarters. All these factors lead me to the conclusion that EA stock is a smart investment right now.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.