An Expensive Cash Cow by TipRanks
© Reuters. Electronic arts: an expensive cash cow
Electronic Arts (NASDAQ 🙂 is a global leader in digital interactive entertainment, specializing in the development, marketing and publication of video games.
Electronic Arts produces and owns the rights to some of the best-known and best-selling franchises, such as FIFA, Madden NFL, Battlefield, The Sims, and many more.
The company has grown into a $ 38.1 billion giant, while management has recently started accelerating returns on capital to shareholders. I am bullish on the stock. (See EA stock charts on TipRanks)
A cash flow machine
Electronic Arts manages a diverse portfolio of franchises, each targeting different audiences, freeing up multiple sources of cash flow for the business.
This allows for a staggered release time for its games, which means consistent revenue. The gaming industry is subject to seasonality, which the company has managed to mitigate.
In addition, economies of scale work considerably in Electronic Arts’ favor, which translates into substantial profitability. The costs remain fixed for a studio, whether a game sells a few thousand or a few million copies.
As Electronic Arts’ player base has grown over the years, the company has gradually increased its gross margins, which currently stand at around 73.4%. Margins are also favored by the tendency of retail sales to go digital, which saves intermediate costs associated with retailing.
With such high gross margins, the company has always been very profitable which, along with its ability to generate consistent sales, makes it a cash cow among its peers.
The company is able to evolve its current securities while maintaining a stable and relatively cheap CAPEX. For this reason, the majority of its operating cash flow declines to become free cash flow.
The business model is not capital intensive, so management can take advantage of the company’s large generation of free cash flow to develop a healthy balance sheet, while returning a significant portion to shareholders.
Return on capital, valuation
The management of Electronic Arts gradually began to return an increasing portion of its excess cash flow to its shareholders. Over the past four quarters, the company has repurchased approximately $ 1.16 billion of its common stock.
Additionally, about a year ago Electronic Arts released a quarterly dividend, currently earning a tiny 0.5%. The return is not that significant now, but the dividend has the potential to grow significantly in the future.
At an annual rate of $ 0.68, that implies a payout ratio of just over 10% based on consensus EPS estimates of $ 6.61 for the year.
With revenues expected to continue to grow as the video game industry continues to grow, the title looks very reasonably priced.
With a forward P / E of 18, the stock is trading at the low end of its historical range. Therefore, it probably offers an attractive entry point for investors.
After all, the company reported $ 6.1 billion in bookings in its latest results, indicating that both revenue and profit should continue to rise as we move forward.
The Taking of Wall Street
When it comes to Wall Street, Electronic Arts has a strong buy consensus rating, based on 16 buys, three holdbacks, and no awarded sells in the past three months. At $ 173.13, the EA mid price target implies upside potential of 29.4%.
Disclosure: At the time of publication, Nikolaos Sismanis does not have a position in any of the titles mentioned in this article.
Disclaimer: The information in this article represents the views and opinions of the author only, and not the views or opinions of TipRanks or its affiliates, and should be considered informational only. TipRanks makes no warranty as to the completeness, accuracy or reliability of this information. Nothing in this article should be construed as a recommendation or solicitation to buy or sell securities. Nothing in the article constitutes legal, professional, investment and / or financial advice and / or takes into account the specific needs and / or requirements of an individual, and nothing in the article constitutes an full or complete statement of the questions or topic is discussed therein. TipRanks and its affiliates are not responsible for the content of the article, and any action taken on the information contained in the article is at your own risk. Linking to this article does not constitute an endorsement or recommendation of TipRanks or its affiliates. Past performance is no guarantee of future results, prices or performance.