Up until a year ago, shares of Electronic Arts Inc. (NASDAQ:EA) had been lagging behind the market. A 10-year stock chart indicates EA stock is up a mere 8.4% in that time, while the S&P 500 has increased by 75%.
But, due to the performance of EA stock over the past two years — up more than 180% — Electronics Arts has begun to pop up on a lot of investors’ radar. With Activision Blizzard, Inc. (NASDAQ:ATVI) being Wall Street’s long-time gaming stock of choice, most investors may not know much about EA stock and why shares have been performing well lately.
Here are five reasons why I love EA stock today:
EA CEO Andrew Wilson
EA promoted Andrew Wilson to CEO in 2013, six months after the resignation of John Riccitello. The promotion of Wilson, who formerly was an executive with the popular FIFA Soccer franchise and vice president of EA Sports, came as a surprise.
But EA’s board has been proven correct.
EA made a dramatic turnaround since Wilson took control in September of that year — revenues grew 21% in 2014 and EA posted a $850 million profit. The stock as been on the rise ever since.
EA’s board took a risk hiring Wilson, but it has certainly paid off for EA stock.
EA Crushes Earnings Estimates
For the quarter, EA on Tuesday reported earnings of $395 million and $1.19 per share. That’s a 7.6% increase from the $367 million and $1.15 per share that EA posted in the same quarter a year ago. Revenue increased from $1.1 billion to $1.2 billion.
Non-GAAP earnings, which includes revenue for some online-enabled games, was $125 million and 39 cents a share. That handily beat analysts’ expectations of 25 cents per share.
EA is on a hot streak that doesn’t show signs of cooling off. Its quarterly earnings has beaten estimates by 56%, 32%, 37% and a whopping 575% in the last four quarters.
EA Has Minimal Debt and a Pile of Cash
As of March 31, EA had nearly $2.1 billion in cash and only $630 million in debt due in 2016. While this may not seem like a big deal to some investors, the idea that a company could be debt-free within just a few months is truly amazing.
Just based on unadjusted earnings for the most recent quarter, EA is only carrying two quarters worth of debt, giving the company the ability to pay off its loans in short order. Or, with that pile of cash on the balance sheet, management could just decide to clean the books tomorrow and be done with the debt, which is likely what will happen when it comes due in 2016.
But, more importantly, being debt-free means that Electronic Arts can take more risks. EA can dump more money into riskier projects that propose higher payouts because management doesn’t need to worry about paying for old debt or if it can take on new debt.
EA’s ‘Star Wars’ Game
Just like the movie, the anticipation for the next Star Wars video game has already begun building. Star Wars Battlefront will be released one month prior to the November release of the much-anticipated movie Star Wars: Episode VII — The Force Awakens. The more hype the movie and other merchandise receives, the better the video game should perform.
The Star Wars video game also opens the doors up for EA, which has been better known for its sports franchise games, including Madden NFL, Rory McIlroy PGA Tour and FIFA Soccer. The Star Wars game could help boost EA into first-player action games, which is a much larger market than just Star Wars fans.
EA Management Forecast
For the next quarter, EA’s management expects the company to post GAAP earnings of $385 million and $1.14 per share, and non-GAAP earnings of zero.
For the year, EA is projecting GAAP revenues of $4.2 billion with income of $647 million and $1.90 per share. Non-GAAP revenues are projected at $4.4 billion with income of $910 million and $2.75 per share, which is better than Wall Street’s EPS estimate of $2.64.
Not only does EA management believe it can do better than Wall Street is expecting, but EA has beat its own estimates consistently over the last few quarters. EA forecasted earnings of 22 cents for the most recent quarter and full-year earnings of $2.35, but blew those figures away on Tuesday.
EA has a history of under-promising and over-delivering, and that’s a great combination on Wall Street.
The Bottom Line
EA stock is the full package, with strong management, good financials, a healthy balance sheet and great prospects for the future. What more could an investor want?
EA looks like a great company to own today and still at a reasonable price for a fast-growing company, currently trading at a price-to-earning ratio of just 24.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on Twitter at @mthalman5513.
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