Electronic Arts Inc. (NYSE:EA) inspires passionate debate among investors. The gaming industry has always been a bit of an odd duck. It seems to go in cycles based on improvement in technology and in content. Gamers have clearly been excited about their pastime, as both technology and content have continually improved.
The thing about EA stock is apparent from its chart. It went nowhere from 2009 to 2014. Then came the improvements in tech and content. Now it seems like producers like Electronic Arts have figured out that content driven by exemplary storytelling and various franchises is what leads to success.
I love that the CEO uses the words “player first.” The credo of starting by understanding what the player wants and needs means — I hope — focus on good storytelling. The company is listening to its users. It has to in order to deliver.
Now that EA stock is supported by diverse revenue streams and a very loyal user base, there’s plenty of room for optimism. It has tons of content that its fans love, like FIFA, Madden’s NFL games, NBA Live, NHL and “Star Wars” content.
What I’m sensing is that EA stock is perhaps best valued as a media company than as a traditional company based on EPS growth. That is, by cash flow. The thing is that EA can have the greatest user base in the world, but if the content stinks then the user base has other options — in the content provided by competitors.
So in many ways, it feels like EA stock is tough to value in the same way that Pixar Studios was tough to value when it was a stand-alone entity. The same goes for AMC Networks Inc (NASDAQ:AMCX), and even Walt Disney Co (NYSE:DIS) studio results.
Everything depends on how much content gets released in a fiscal year, and the response to it.
If Disney’s quarterly results are impacted year to year because, say, the latest “Star Wars” movie comes out in Q1 of one year, but not in the next year, then you can’t make a YoY comparison. The same goes for AMC’s programming schedule. If Breaking Bad is there one year and gone the next, then you can’t make the apples-to-apples comparison.
The same goes for EA stock, I think. With Disney, the studio revenue is just a part of the conglomerate so you can value it on a per-share earnings and price-earnings ratio. AMCX, though, not so much. It’s about cash flow. The same goes for any of John Malone’s ventures.
And EA stock has phenomenal cash flow. It reminds me very much of online travel companies, in that neither has much in the way of capital expenditures. There’s nothing to maintain.
EA stock had free cash flow of $972 million in FY14, $1.13 billion in FY15, and $1.26 billion in FY16. Moreover, it has $1.55 billion in the TTM. EA stock has $3.5 billion in net cash.
Bottom Line on EA Stock
So on a P/FCF basis, EA stock trades at 23x TTM FCF. AMCX trades at 11X, but its FCF is not growing as consistently. HSN, Inc. (NASDAQ:HSNI) trades at 11X. Lions Gate Entertainment Corp. (USA) (NYSE:LGF) trades at 13X. But look at Activision Blizzard, Inc. (NASDAQ:ATVI) — trading at 33X FCF.
Now, getting back to that release schedule, EA only has one super-must-have title coming out … in 2018 (Anthem). So there’s an issue for EA in the near term. I don’t think this is something that hampers the company long term, and it’s part of the beast.
Overall, though, I love the cash flow EA stock puts out and it has a fantastic war chest of cash to compete. Game on!
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, he did not hold a position in any of the aforementioned securities.