Is Electronic Arts (NASDAQ: EA) Suddenly A Safe Haven?
Video game maker Electronic Arts (NASDAQ: EA) reported their fiscal Q4 earnings this week, and they more than justified the stubbornness seen in their shares in recent weeks.
Video game maker Electronic Arts (NASDAQ: EA) reported their fiscal Q4 earnings this week, and they more than justified the stubbornness seen in their shares in recent weeks. While equity markets have sold off relentlessly during what is turning out to be one of the worst starts to a year in living memory, shares of EA are ‘only’ down about 20% from last year’s high.
If this was last year, such performance would be catastrophic, but in the context of 2022 it’s quite attractive really. The S&P 500 index is down about the same, while the tech-heavy NASDAQ index is down close to 30% from its all time high. Looking at individual names, Netflix (NASDAQ: NFLX) shares are down 75%, Facebook (NASDAQ: FB) are down 50%, and Amazon (NASDAQ: AMZN) are down more than 40%. You’d be forgiven for thinking that maybe, just maybe, video game stocks are replacing gold as the traditional safe haven for equity investors.
Let’s take a look at their numbers and see what’s behind the bull’s stubbornness.
For starters, the company’s EPS was a healthy $0.80 and well ahead of what analysts were expecting. Revenue for the quarter was a little soft on the consensus, but still up more than 17% on the year. Investors also learned that the EA player network grew 16% year on year to more than 580 million unique active accounts. These are admirable growth numbers, particularly as industry numbers haven’t been great this year so far.
While video game sales boomed during COVID, thanks to more people than ever before being locked up at home, they’ve been trending down since late last year. Fresh numbers this week showed that consumer videogame spending fell 8% in the first quarter compared to the same period in 2021, an “indicator of the comedown from mid-pandemic highs as some consumer dollars found their way back to alternative experiences, and the industry continued to struggle to get new consoles into buyers' hands.”
So when EA is still able to push out a report like this, it’s easy to see why Wall Street still very much likes the cut of their jib. Andrew Wilson, CEO of EA, spoke bullishly to the future, saying that “FY22 was a record year, with hundreds of millions of players around the world joining in our games to play, watch, and create with one another. With amazing games, built around powerful IP, made by incredibly talented teams, and outstanding engagement in our live services, FY23 is set to be a year of innovation and growth for Electronic Arts.”
The company’s CFO, Chris Suh, echoed the sentiment when he remarked that “we finished the year with another strong quarter of revenue and profit growth, driven by our live services business which was 85% of our net bookings in Q4. We have a strong foundation of deeply engaged players, rich IP, and a resilient business model, which we will continue to invest in to deliver growth in FY23 and beyond.”
In addition to all of this, management gave a bullish signal to investors this week when they upped the company’s dividend by 12%. This is one of the most bullish signals investors can get, and tells us that management is very confident about the company’s prospects in the months ahead. The strong report and dividend hike didn’t go unnoticed either. MoffettNathanson upgraded their rating on EA stock to Buy from Neutral, and set its price target to $141. From the $120 that shares closed at on Thursday, this still suggests an upside of some 16% to be had. The team over at Jefferies reiterated their Buy rating, while noting their surprise at an increase in full-year guidance amid the sector pressures right now.
Wedbush kept its Outperform rating as well, but trimmed its target to $164. The quarter was in line with his expectations, analyst Michael Pachter says, but "we expect growth in the foreseeable future driven by cost discipline, digital sales growth, several key franchises, and multiple recent acquisitions." Credit Suisse made a similar move, trimming its price target to $162, suggesting there’s 30% upside to be had from current levels.
It’s a tough time to be an equity investor right now, but EA could just be one of the better places to park your cash right now.
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