Significant Upside Ahead for Major Games Publisher
Our findings on how major US video game makers and publishers can narrow their valuation gaps to Chinese media juggernaut Tencent pointed us to an MP entry into Electronic Arts, Inc. (EA). Its Q1FY21 earnings release was the company’s largest first quarterly report to date, and is only the beginning for EA’s upward trajectory into a new console generation. E-sports also remain at the forefront of our growth expectations as the new-age competitions gain traction.Earnings Update…
On July 30, 2020, Electronic Arts, Inc. (EA) announced its Q1FY21 results. The company’s revenue was $1.4bn (higher than The Edge’s estimate of $1.2bn and the consensus estimate of $1.1bn), while adjusted net income was $415m (also higher than The Edge’s estimate of $356m and the consensus estimate of $227m). EA’s Q1FY21 EBITDA was $546m, beating The Edge’s and the consensus estimates of $449m and $300m, respectively.
What We Said…
We believe the strong traction in e-sports (particularly its viewership strength) makes EA a compelling investment opportunity. Currently, EA trades at a 30% discount compared to the market leader Tencent (TCTZF, at 21.9x). Moreover, its net cash positive balance, attractive EBITDA margin profile and the anticipated continued growth in the gaming space (especially with a new console generation about to be released this holiday season) means EA is hard to ignore.
The Edge View…
In Q1FY21, EA surpassed The Edge’s and consensus estimates and registered the largest first quarter in the history of the company. The key driver behind these strong earnings is the addition of tens of millions of new gamers to the EA Player Network, with FIFA alone attracting 7 million new players on consoles during the quarter. As a result, EA’s management has raised its FY21E guidance, with operating cash flow raised by $275m to $1.9bn, revenue now expected at $5.6bn ($400m above prior guidance), and EPS at $2.97 per share for the full year. In e-sports, EA has doubled down on broadcasting events. By using its cloud-based broadcasting platform, EA delivered 85% more e-sports broadcast content in the last four months than the entirety of 2019.
The significant addition of 7 million players in FIFA is a big positive, although they may not be adding up to the average revenue per user (ARPU) currently. However, this expanded player base will likely generate more revenue for EA over time, pushing ARPU upward. Additionally, three big games are expected to launch in October 2020 – Star Wars: Squadrons (October 2), FIFA 21 (October 9) and NHL 21 (October 16). These launches are anticipated to help EA continue its strong earnings traction in the near-term, and we recommend investors to enter EA at current levels to take advantage of this upward trend.
Electronic Arts develops, markets, publishes and distributes games, content and services that can be played and watched on a variety of platforms, including game consoles, personal computers, and mobile phones. The company markets and sells its games and services through digital distribution channels and through retail channels. Digitally, the company's console games and services can be purchased through third-party storefronts. In its games and services, the company utilizes brands that it either wholly own or license from others. The company develops and publishes games and services across genres. Within and alongside its games, the company provides live services, including in-game purchases, downloadable content, and esports.
The Edge Group - Global Fundamental Catalyst Investing. The Edge provides investors with access to hidden corporate value from Global Special Situations using a pioneering approach to investments. Founded in 2005 by fund management and investment banking professionals to provide high quality, private equity-level research on Global Corporate Divestitures for the benefit of fundamental event-driven, growth and value-oriented investors in this difficult to track, but proven investment space.
The Edge will look to screen and analyze include Spinoffs; Reverse Morris Trusts; Squeeze Outs; Privatizations; Demutualization; Deep Discounted; Rights Issues; Rights Offering; Restructuring; Insider Purchases / Buying Change of Management / CEO Change; Deteriorating fundamentals; Post-Bankruptcy; Reorganization; Tender Offer; M&A Deals; Secondary Offering; Share Swap; Thrift Conversions; Share Buybacks; Activist; Mergers. All analyzed from a fundamental point of view.
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