More Reasons To Consider Buying Electronic Arts Stock
About a month ago I finished up our series chronicling 3 Nasdaq Stocks You Should Consider Buying As The Index Reaches An All Time High.
You can read about all three stocks using the link below.
And in Part 3 above, I told you why to consider buying Electronic Arts (EA) stock… Even as the NASDAQ was reaching its all time high price point.
You can read the full article above.
But if you don’t want to here’s a quick recap of why I said you should consider buying EA stock.
Estimates vary today, but most peg that the entire video game industry is produced sales north of $135 billion worldwide in 2019.
And by 2022 the business of video games is projected to reach almost $200 billion in annual sales.
Another factor with video games in the short term is the coronavirus.
With more and more adults and kids staying home now due to the virus. Combined with the launch of the next generation of gaming consoles later this year. And video game sales will continue accelerating.
Another factor helping EA grow so much in value over time is that it’s one of the best run video game companies in the world. And its enormously profitable.
Over the last decade EA produced an average 14% operating margin every year over the last 10 years. I look for any company to produce above 10% margins on a consistent basis to consider a stock for investment.
But this isn’t the full story.
From 2015 to today EA’s focused more on profitability through cutting costs and in those 6 years its operating profit margin ballooned to 23.5% per year on average.
Operating profit is the amount of profit a company produces from its operations… And is after subtracting costs to do business and research and development of new games… Which EA invests in enormously.
It also produces a ton of cash too…
Its FCF/Sales margin averaged 19.6% per year every year for the last decade… I look for anything above 5% on a consistent basis to consider an investment.
Again, this is great, but it doesn’t show the full story of EA…
The lowering in costs from 2015 to today boosted its FCF/Sales margin to 27.1% per year on average.
Both operating profits and free cash flow production at these levels is fantastic and it puts EA into the great company category. I estimate that far fewer than 5% of all companies on Earth consistently generate margins above my minimum thresholds above.
And EA shatters these.
High margins help drive the company’s value and share prices higher over time. And they’re also important because they show EA produces enough profits and cash to continue funding operations and growth into the future to stay ahead of its competitors.
These enormous profits also make EA’s a super safe investment as well.
With all this you figured EA stock would be expensive right now… But it’s not.
As of this writing, its selling at a P/E of 13 and a P/CF of 22.
I look for potential investments to sell below 20 on both metrics. And while EA is above the P/CF it’s not over this by a massive amount.
These show the company is at best undervalued by a large margin. And at worst about fairly valued today.
To sum up…
• It’s a leader in the video game arena and will continue being so for years to come.
• It produces huge profits and cash flow.
• It will benefit from the coronavirus crisis.
• Its cheap.
This was the thesis I laid out on the 7th of July for you when I first talked about EA stock.
And it was proved out on July 30th 2020 when EA released its most up to date financial information.
Revenue rose from $1.21 billion in the 1st quarter 2020 financial results to $1.4 billion in the 1st quarter 2021 financial results.
EDITOR’S NOTE – EA has a different financial year than most companies do which is why the years seem off.
And it reported 1st quarter 2021 net income of $365 million.
This number looks like a gigantic fall because in the 1st quarter of 2020 it produced net income of $1.4 billion in the quarter.
But this isn’t an apples to apples comparison…
In the first quarter of last years financials the company produced a huge $1.4 billion net profit after a onetime tax benefit.
That tax benefit in total was $1.7 billion.
After subtracting that the company earned negative $300 million in net income in the same quarter last year. And this year they earned a net profit of $365 million in the quarter.
This is a difference of $665 million to the positive side for EA in the quarter.
Its results improved drastically due to people being at home more and buying more video games during this pandemic.
And these improved results should continue for the foreseeable future with coronavirus cases still exploding higher worldwide.
For these reasons, we still recommend you consider buying EA stock.
Use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.
Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.