Electronic Arts’ success depends not only on successfully moving into this digital space, but on the single-most important aspect of gaming: making great games. The company has a good track record so far.
Electronic Arts’ financials are mixed. It holds $1.85 billion in cash with no debt. However, thanks to competition and the weak economy, the company has not posted a profit in any of the past three years. Losses are declining (from $1.08 billion in FY 2008 to $276 million in FY 2011), and the company has posted a profit the past two quarters. Free cash flow was negative in FY 2008 and 2009, but a positive $260 million in FY 2011. The company has $120 million in free cash flow in the trailing 12 months.
Backing out the $5.50 per share in cash, Electronic Arts is trading at $17 per share, against FY 2012 projected earnings of 90 cents per share, giving it a P/E of 19. For FY 2013, $1.20 in earnings yield a 14 P/E. Analysts see a five-year annualized growth rate of 15.7%.
It’s difficult to say how the company will perform because everything depends on the quality of its games. With all the new revenue streams available — particularly digital ones that do not require as much expense for hardware creation — the company is well positioned. I’d say that investing in Electronic Arts is not for the faint of heart, and the stock appears fully valued at the moment. It’s a “buy” for aggressive investors, while others may want to wait for a pullback to increase their margin of safety.
Lawrence Meyers does not own shares of Electronic Arts.