Shares of videogame maker Electronic Arts Inc. (NASDAQ:EA) slipped more than 3% this past week as the company reported revenue and earnings which approximated analyst expectations. The game developer has been on a very interesting ride in recent years, with its share price appreciating more than 8-fold over the past five years on earnings strength and traction relating to some of the company’s core products.
With such a high degree of forward momentum built into EA’s share price, it is no surprise to many investors that profit-taking and investor complacency have resulted in a near-term dip in the company’s stock price this past week. The long-term ability of the company to continue to shift toward profitable growth, however, remains solid, and this latest small dip may provide bullish investors with a buying opportunity heading into the company’s third quarter.
Here’s a look at how the company’s earnings shaped up, and some of the earnings drivers which could take EA shares even higher in 2018.
Q2 Earnings Strong, In Line with Analyst Expectations
The company reported top line revenue numbers of $1.18 billion this past quarter (in line with analyst expectations), and a net loss of $22 million or $0.07 per share, narrowing the gap from the quarterly loss of $38 million or $0.13 per share in the same quarter last year.
Despite posting a net loss this previous quarter, EA has remained consistent in returning value to shareholders in the form of share repurchases which amounted to 1.3 million shares or approximately 0.4% of the total float this past quarter, with the total value of share repurchases increasing from $127 million for Q2 2016 to $153 million for this past quarter.
EA’s year over year revenue growth of 6.4% was bolstered by growth in the company’s digital segment, with a larger number of consumers purchasing games and smaller in-game purchases digitally. The company’s 17.9% growth in digital revenues far outpaced a reduction in packaged goods revenue. This means that EA is continuing to grow its more profitable revenue segments at a faster rate, displacing higher-touch revenues with higher-margin purchases by brand-loyal consumers who continue to purchase new releases of the company’s “stable and dependable” sports titles and re-releases of non-sports related games.
Long-Term Growth Drivers Remain Robust
EA has followed its competitors in continuing to provide an increasing number of options for consumers to purchase its products in a digital format, replacing middlemen and other retail channels in the distribution of its games. With shares of video game retailers such as GameStop Corp. (NYSE:GME) reflecting this shift, the distribution model of EA should be given significant credence for long-term investors pricing in cash flows for EA moving forward. The ability of EA to continue to provide end to end service for its core gamer consumer base is one of the key drivers which will continue to be the focus of investors moving forward.
That said, EA has continued to battle competitors for market share in an increasingly competitive space. Its larger compatriot Activizion Blizzard, Inc. (NASDAQ:ATVI) has demanded a higher valuation multiple and market capitalization on the perceived strength of the company’s product offering which has outperformed that of EA of late.
In particular, investor concern related to the ability of EA to turn its “Star Wars: Battlefront II” game into a profitable franchise remains, with a yet-to-be-named Star Wars game set to be released later than expected, in fiscal year 2019. The company closed the studio which was working on the game, delaying the release of the next-generation game, disappointing some investors. Analysts, however, remain bullish on EA stock despite this announced setback, with the analyst consensus for EA stock currently above $127 per share.
Chris MacDonald has no position in any stocks mentioned in this article.
