Over the past four quarters, Electronic Arts (NASDAQ:EA) had positive earnings surprises of 33.7%, 2,400%, and 11.6%, along with a negative surprise of 0.5% in the third quarter of fiscal 2019. It would be very good for EA stock if the company were to deliver a fourth consecutive quarterly earnings surprise.
Will it do it? I believe it will.
In the meantime, regardless of what happens with the company’s earnings surprises, I’ll be considering several things as I read through its Q3 2020 financial statements and conference call transcript.
Where Is the Growth?
Analysts are expecting EA to deliver net bookings of $1.97 billion and adjusted earnings per share of $2.51 in this year’s third quarter. That’s 22% and 9% higher than a year earlier. The company’s guidance in October for net bookings in the third quarter was $1.94 billion, almost identical to the consensus estimate.
If recent history is any judge, it’s likely that EA will deliver very close to its revenue guidance but will exceed earnings. It expects to earn 92 cents a share on a GAAP basis in the third quarter, 7% higher than a year earlier.
According to InvestorPlace contributor Ian Cooper’s mid-January article, Benchmark analyst Mike Hickey believes EA will raise its 2020 guidance when it reports earnings. I’ll definitely be looking to see what the company says regarding future quarters, both in terms of the press release and earnings call.
Cooper also mentioned that SunTrust Robinson Humphrey analyst Matthew Thornton thinks the company’s eSports development around FIFA and Madden will reap benefits in the next few quarters. I’m eager to see what this means for its Ultimate Team business.
Another area that I’m interested in learning more about from earnings is the work EA is doing around Star Wars. Piper Sandler analyst Michael Olson, who has an overweight rating on EA stock, recently suggested that “Star Wars Jedi: Fallen Order” could drive its viewership on the Twitch live-streaming service.
Live services revenue in the second quarter of 2020 was $573 million, 39% higher than a year earlier. EA continues to commit more resources to this area of its business.
“We are doubling-down on live services combined with our core franchises,” EA CFO and COO Blake Jorgensen said in October. “We’re investing in games that people play for longer and engage with much more deeply. This focus will continue to drive growth and profitability for the company through the remainder of this year and beyond.”
The company’s live services revenue in Q3 2019 was $480 million. I would expect Q3 2020 will be well over $600 million. We’ll know more shortly.
The Bottom Line on EA Stock
Back in October, I stated that it would take EA 18-24 months to get to $175. Trading around $111 as I write this, to reach this target in less than 18 months will require a major catalyst.
As my colleague suggested, the launch of new gaming consoles by both Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) later in 2020 should boost sales of Electronic Arts video games. That’s especially true for “NBA Live”, which didn’t ship in 2019, because EA decided that it made sense to roll it out once the new Xbox and PlayStation consoles hit the marketplace.
In addition to all the various revenue streams EA has, I’ll be watching to see where the company’s free cash flow is headed. When I wrote about Electronic Arts in November, it had a free cash flow yield of 5.3%, something that I felt made it cheaper than its peers.
Over the trailing 12 months through the end of September, the company’s free cash is $1.6 billion. That’s higher than it has ever been. I would expect that the third-quarter results will show that its trailing 12-month free cash flow is higher than $1.6 billion. By the end of the fiscal year in March, it could be over $2 billion.
Whatever the third quarter brings, EA stock looks like it’s ready to deliver for shareholders in 2020.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
