Electronic Arts is a solid Buy, this investor says

Video game giant Electronic Arts (Electronic Arts Stock Quote, Charts, News, Analysts, Financials NASDAQ:EA) seems to have gotten caught up in the turn away from tech and high-growth names that started late last year. But that’s an unfair association, says portfolio manager Lorne Steinberg, who argues that EA has the stuff of a secular stock, one whose business will stay strong in almost any economic climate. 

“I wouldn’t really call it a technology company. And is it a high growth stock? It’s more of a mature gaming company,” says Steinberg, president of Lorne Steinberg Wealth Management, who spoke on a BNN Bloomberg segment on Wednesday.

“You’re looking at revenue growth in the seven to ten per cent levels with phenomenal free cash flow that they’re using to grow their business and they pay a tiny dividend that will grow over time. It’s a good, solid, secular grower,” he said.

Electronic Arts, the name behind gaming brands like FIFA, Madden NFL, Battlefield, F1 and The Sims, saw its share price shoot upwards over the first half-year of the COVID pandemic, an easy call for investors aiming to catch the wave of pandemic-friendly companies in the tech and entertainment sectors. Not so good for the airlines and hotel stocks, the stay-at-home economy was a boon for e-commerce companies like Amazon and Shopify, for example, streaming content providers like Netflix and gaming companies like EA, Take-Two Interactive and Activision Blizzard.

But with the market deciding that we’re in a reopening phase (although currently rising COVID numbers could signal otherwise) and with interest rates rising in 2022, pandemic stocks and growth names in general have been hit hard in recent months.

That includes Electronic Arts, which had gone from about $110 per share pre-pandemic to $145 by the summer of 2020, and then coasted for about a year before the pullback began in earnest in November, 2021. Since then, EA has lost a good chunk of those pandemic gains and is currently trading at around $125. 

“Electronic Arts has sold off with people getting out of their houses and going back to school,” said Steinberg. “But their revenues are still growing at a very healthy pace.”

“They have so many of the world’s great franchises from FIFA and NFL football on down, and for us, it’s a core holding,” he said. “They’re going to be playing more and more in online gaming and that kind of thing, and kids are just spending more and more time, fortunately or unfortunately, in that world and they are a major, major player there.”

EA last reported its quarterly financials in February where the company’s third quarter fiscal 2022 (ended December 2021) saw net revenue climb to $1.789 billion compared to $1.673 billion a year earlier. (All figures in US dollars.)

But net income dropped from $211 million to $66 million and EPS dropped to $0.23 per share compared to $0.72 per share a year earlier. The company’s adjusted sales/net bookings, which includes net revenue and the change in deferred net revenue for online-enabled games, was $2.58 billion compared to $2.40 a year earlier. Analysts had expected adjusted sales of $2.66 billion.

“FY22 has been a year of outstanding growth for Electronic Arts, and we’re proud that our franchises were among the most-downloaded, most-played, and most popular titles over the last year and the holiday quarter,” said Andrew Wilson, CEO, in a press release. “Our network of more than 540 million unique active accounts continues to expand, players are spending more time in our games, and with our amazing IP we are well-positioned for continued growth.”

Looking ahead, in the fiscal Q3 report management guided for fiscal fourth quarter adjusted sales of $1.76 billion, which was also lower than expected, with the Street calling for $1.81 billion. 

At the same time, EA said its net cash from operations was a record in the fiscal third, hitting $1.534 billion, while the company continued with its share buyback plan, repurchasing 2.4 million shares which brought the shares repurchased over the last 12 months to 9.4 million, worth $1.3 billion. What’s more, EA said that consumer involvement with its products continued to grow, with players having spent 20 per cent more time in EA’s games so far in the fiscal 2022 than they did in the previous year.

“Q3 was the largest quarter in the company’s history for net bookings, underlying profitability and cash generation,” said CFO Blake Jorgensen in the press release. “Our portfolio approach will enable us to deliver organic growth in the double digits this year, continue to deliver strong cash flow, and provides a strong foundation for growth as we look to the future.”

Last month, EA launched its latest free-to-play mobile offering, MLB Tap Sports Baseball 2022, the first game released by the company following on its acquisition of Glu Mobile for $2.1 billion.