Amazon isn’t buying Electronic Arts, but you might want to
The video game publisher should reward patient investors
Electronic Arts has done next to nothing for the last five years.
EA the stock, not the company, but I’ll circle back to that in a second.
We’re not talking about a slow-moving utility stock like AEP. We’re not even talking about a low-to-no-growth telecom with a juicy dividend like Verizon. We’re talking about a video game publisher with ridiculous margins and more than a few blockbuster hits under its sphere of influence (Madden, the soccer game formerly known as FIFA and Battlefield, EA’s answer to Call of Duty, just to name a few).
Typically software companies with high multiples perform better than the overall market, you know, in order to justify those valuations.
Not so much for EA, though, which has big moves about as often as the groundhog sees its shadow.
That is until USA Today reported Amazon was planning to make an offer to acquire the company.
Turns out, that offer was never made. Electronic Arts saw its share price shoot up on the initial news before slowly slipping back to around the same place it started.
It was a rare bit of volatility for a stock you’d think would be much more volatile.
Anyway, the story and the ensuing swings in shares of Electronic Arts got me thinking: how in the world is this company valued at or near the same valuation as it was five years ago?
How?
Here’s what I, a market participant just like you, think is going to happen with the stock:
Short term, Electronic Arts is going lower
I really like EA medium and long-term, but I hate its short-term outlook. The stock has a price-to-earnings ratio of over 40. Some things over 40, like a fine wine or the retirement portfolio of a disciplined dividend-growth investor, are great. Other things, like price-to-earnings ratios, are less great.
That’s not always the case, but it certainly is right now. In this environment, with rising rates duking it out with recession fears, the market hates high-PE stocks.
It absolutely despises them, actually. The only thing the market hates more than high-PE stocks are no-PE stocks like Robinhood and Peloton.
Something tells me, that once the buzz from the Amazon rumor fades into the sea of irrelevancy that ultimately swallows all the old news stories from Bloomberg and CNBC days if not hours after they break, Electronic Arts will continue to sink lower and lower.
I’m not going to pretend to be able to predict a bottom, but I could certainly see Electronic Arts, and the market as a whole, falling another 5-10% from current levels. There’s just too much uncertainty in the world right now … and we all know the market hates uncertainty.
Medium-term, Electronic Arts will be higher
The company wasn’t purchased … this time.
Zoom out a bit, though.
At the right price, I could totally see a company like Apple or Amazon swooping in and making a bid. Microsoft recently announced plans to acquire Activision Blizzard (ATVI), so, following suit with an acquisition of its own — an acquisition that would significantly bolster its stash of valuable intellectual property — would be on brand for each of the aforementioned Microsoft competitors.
IP, after all, is being monetized in so many ways these days.
I mean, a series based on Fallout, a franchise Microsoft now owns thanks to its purchase of Bethesda, is currently in production by Amazon. That deal will most certainly make both companies a decent amount of money. Fallout 4, the most recent standalone game in the series, broke records at retailers when it was released back in 2015, earning more than $750 million in revenue.
Long-term, Electronic Arts will make you a lot of money
If the $750 million in revenue Bethesda got back in the winter of 2015 impressed you, wait until you hear about the kind of scratch Electronic Arts is raking in with hits like Apex Legends.
Apex Legends Mobile earned nearly $5 million within a week of its global launch and Apex Legends, the standout Battle Royale, is projected to earn nearly $1 billion in the fiscal year 2022, according to Electronic Arts.
According to the website playercount, Apex Legends has an estimated 1,083,302 players online as of April 11, 2022.
That’s a lot of people spending a lot of money on a game Electronic Arts can monetize season, after season, after season.
Every few months or so, an update drops with new character skins, emotes, weapon charms, and map changes — items its already immense and constantly-growing player base will gladly pay $10 to unlock through leveling up the battle pass.
The game has in-season events as well — events EA takes full advantage of by offering more skins and cosmetics for a small fee, also known as a microtransaction.
Electronic Arts also owns the sports landscape with signature franchises like Madden leading the way.
The Sims, another popular title, gives the company natural exposure to the next stage of the metaverse if or when that turns out to be a thing.
There’s a lot to like. Apex Legends is making a billion bucks a year and Electronic Arts has a stock price that’s almost the same as it was five years ago, give or take a few percentage points. Keep in mind, Apex Legends wasn’t even a thing five years ago.
The company also recently became a dividend-growth stock, which makes it an even better long-term buy in my opinion. It initiated a dividend program last year and raised it this year. Currently, EA pays shareholders $0.76 per share each year (or $0.19 a quarter). It yields 0.60% and the payout ratio is low, just a smidge above 10%.
Disclaimer: I’m a market participant, not an analyst. This is not financial advice.
