Electronic Arts, Inc.

+1.11 (+0.78%)
4:00:00 PM EDT: $142.45 0.00 (0.00%)
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Why Electronic Arts May Be the Greatest Comeback in All of Technology


##Symbol## EA

If gaming stocks aren't your cup of tea, how about this fact: Electronic Arts has 160 million monthly active users. That ain't gaming, that's social media and rivals the likes of Twitter (TWTR) which has about 300 million monthly active users. And yes, the two have essentially identical market caps now.

Electronic Arts has some of the most powerful fundamentals in all of the world, not to speak of just within technology. As we know, the relationship between fundamentals and stock prices is one of causation and its no wonder that the stock price is exploding to new all-time highs, up 30% in just the last quarter and nearly 100% in the last year. To put it into perspective, there is only one company in all of technology with a market cap above $20 billion that has both a five star fundamental rating and a five bull technical rating. I have included the scan for those firms and allowed 4.5 star companies in to show the company EA shares.

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Incredibly, EA has some huge doubters, and in fact, the firm was voted the worst publisher in the gaming industry a few years back and twice the "Worst Company in America" (Source: Forbes.com. But all of the controversy is now more than a year old. The company has escaped the gaming industries love for criticism and even hatred. This very well could be the single greatest comeback and transformation in all of financial markets, let alone the gaming industry. The firm is building on existing franchises, was revealed to be the number one company in terms of sales on both PS4 and Xbox One. The company is also killing it in digital with strength in subscriptions, advertising, extra content, and full-game downloads.

EA has seen revenue (TTM) rise over both one- and two-years by 26.3% and 18.9%, respectively. Net income (TTM) is "trending higher" (it has risen for more than five consecutive quarters) up to $875 million from $8 a year ago. Yes, that's a 10,838% rise in earnings. Operating margins are increasing, free cash flow is increasing, all while R&D has stayed about the same at a steady ~$280 million. Let me walk you through perhaps the greatest comeback ever in the gaming industry and then introduce you to the bullish thesis that things will continue to improve.

Technicals   |   Support: 67.8   |   Resistance: 73.54   

Golden Cross Alert:
The 50-day MA is now above the 200-day MA.
Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

EA has a five bull (top rated) technical rating because it's trading above its 10-, 50-and 200- day moving averages and the stock is up on the day.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-07-30 $-0.09 $684 million M $662 million M $1.2 billion M Provided by ZACKS

Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 4,515 3,575 3,797 RISING

Operating Margin (QTR) 1.508 1.48 1.41 RISING

Net Income (TTM US$ Millions) 875 8 98

Levered Free Cash Flow (TTM US$ Millions) 669 634 254 RISING

Research and Development (US$ Millions) 285 289 287 FALLING

Research and Development Expense/Revenue 0.241 0.257 0.237 FALLING

Stock Returns and Chart

EA is up +30.6% over the last three months and up +52.2% over the last six months. The stock price is up +97.5% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 4,5153,5753,797RISING

Note that EA is growing revenue by 26.3% year-over-year and now sits at an all-time high of $4.5 billion (the green bar in the chart below designated the all-time high). Any growth number over 20% has an added impact on the fundamental (star) rating. The company also has rights to the Star Wars video game license, and if executed properly, that could be a game changing, doors blown of the hinges, winner.

What do all these numbers mean?
EA's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Operating Revenues/Operating Expense 1.5081.481.41RISING

Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. There's cyclicality to EA's business (and any consumer retail driven business), but if we look year-over-year we see an impressive trend in the chart below. While this ratio must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter EA showed a ratio of 1.508. For context, Activision (ATVI) has an operating margin of 1.73, so there's room yet for growth.

What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 1.48. In the last year we can see operating margins are increasing and are also currently greater than 1.0 (the critical level).

EA's fundamental rating was affected from the operating margin numbers in two ways:
1. The current value is above 1.0 (the firm generates an operating profit).
2. The one-year change was positive (raises the rating).

Let's look at Operating Revenues/Operating Expense in the chart below.

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Net Income (TTM US$ Millions) 875898

Of all the visuals we'll look at, the net income chart may be the most powerful. If you want to see transformation, this is it. Net Income (after tax profit) over the trailing twelve months (TTM) for EA is up over 10,000% (granted that's mostly just small number math) from $8 million to now a company with nearly $1 billion in profits ($875 million). The company showed losses of over $1.3 billion in the year ending Sep 2009, and is now up over $2 billion from that level. Further net income (TTM) is "trending," meaning it's up for five consecutive quarters. The current value of $875 million is an all-time high (again, see the green bar in the chart below).

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars.

Research and Development (US$ Millions) 285289287FALLING

As EA has worked out the rather huge kinks in its games and public perception, it has maintained a healthy level of R&D. Research and Development (US$ Millions) in the most recent quarter is down 1.4% and don just 0.7% from two-years ago. Essentially R&D has stayed put, which is relatively healthy place for a company to be in. In our final time series chart we plot Research and Development (US$ Millions) in the blue bars.

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Electronic Arts was literally voted the "worst company in America" on multiple occasions but very well may be up for best company if all things continue. The company is keeping costs under control all the while it continues to develop big releases within its key franchises, and by embracing the digital age with 30%+ growth in that area. For 2014, we learned that EA was the top publisher in terms of cash made on the PlayStation 4 and Xbox One systems. It has heavy competition for Activition (ATVI) and Ubisoft but is beating them rather handily. From the earnings release in Jaunuary of 2015, EA reported that in-game purchase business model for EA Sports’ lineup of Ultimate Team games saw an 82 percent year-over-year increase (Source: Venture Beat). Further, mobile sales are growing double digits as the company reaches over 160 million active users.

The bullish thesis for this company surrounds all of these things - rising revenue, earnings, margins, lower costs, great franchises and both mobile and digital growth. The future looks bright for this one-time hated company and hated stock.