According to market research provider Reportlinker.com, the global gaming market is forecast to grow at a 17% rate and reach a value of more than $250 billion by 2025. A major beneficiary of the explosive growth in video game entertainment is expected to be Electronic Arts (NASDAQ:EA).
Electronic Arts has already recorded impressive growth in recent years. And with the popularity of video games surging during the pandemic, the maker of some of the hottest gaming titles has witnessed an acceleration in demand.
On February 2nd, however, Electronic Arts' quarterly performance failed to excite investors. Its stock price retreated after running up prior to the report. But with an industry-leading product lineup and a long growth runway ahead, it is still game on for Electronic Arts investors.
What Did Electronic Arts Report in Q3?
Electronic Arts posted mixed results for its fiscal third quarter. Revenue of $1.67 billion surpassed the consensus estimate of $1.59 billion, but earnings per share (EPS) of $0.72 fell short of analysts' expectation of $0.78.
The all-important net bookings metric came in at $2.4 billion, a company record. This figure adds revenue to the company's change in deferred revenue for its online games. It is considered an important indicator of performance because it includes the sale of both physical and digital products and services.
Record net bookings were largely the result of growth in live service games such as Ultimate Team and Apex Legends. Within this segment, mobile games continued to perform well notching their third straight quarter of growth with FIFA Mobile and Star Wars: Galaxy of Heroes leading the charge.
Electronic Arts repurchased another 2.5 million shares worth $326 million during Q3 brining its buyback total to 5.9 million shares or $695 million over the past year. The third quarter also marked the first time Electronic Arts rewarded shareholders with a dividend.
The company said it expects fiscal 2021 revenues of around $5.6 billion while the Street was forecasting $6 billion. More importantly, it raised its guidance for net bookings to $6.075 billion based on the strength it is seeing in the business. And looking further down the road, management sees a strong fiscal 2022 performance due in large part to the anticipated release of the next Battlefield game.
What are Electronic Arts' Growth Drivers?
What's perhaps most compelling about the gaming space from an investment standpoint is the increasingly social nature of video games. A big part of the experience for gamers is being able to connect with friends and acquaintances from all over the world through online game platforms.
No longer are video games an activity resigned to lonely souls in their parents' basement. The social interaction associated with today's video game audience translates to a deeper level of user engagement—and increased sales opportunities for companies like Electronic Arts.
As Electronic Arts continues to expand its global audience, it has several avenues for growth. The buildout of the EA Sports portfolio will be a big part of this. Over the past 12 months, the EA Sports franchises engaged more than 230 million people worldwide. New sports offerings to complement wildly popular games like Madden NFL, NHL, and FIFA should keep this key growth engine going.
Aside from new sports and action game launches, live services are expected to be a core part of Electronic Arts' growth strategy. Live service games provide an ongoing stream of content and updates to keep the audience interested. This along with the interactive nature of games like FIFA and Madden keep players coming back for more. Electronic Arts now has a dozen live service games in the hopper for use on gaming consoles and computers and the expansion of this portfolio represents a major growth opportunity.
Is it a Good Time to Buy Electronic Arts Stock?
Since Tuesday afternoon's earnings report sell-side analysts have been largely supportive of Electronic Arts stock. Four firms have issued buy ratings with price targets ranging from $165 to $175 while three have taken a more cautious 'hold' stance.
In terms of valuation, Electronic Arts trades around 27x forward earnings which is a slight premium to its peer group average. It is a premium multiple that is warranted given the company's track record of pumping out blockbuster titles and the rising popularity of the gaming industry on a global scale.
Going forward, Electronics Arts is in a highly advantageous position to benefit from one of the surefire growth areas of the next five years. Opportunities in digital distribution, mobile gaming, and live services all appear to be in the early innings of the growth game. As the latest generation of gaming unfolds, Electronic Arts' leadership makes it as a compelling long-term growth play.
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