Electronic Arts has had an impressive run over the past six months. While the S&P 500 has been flat, the stock has returned 15.8% and now trades at $199.34. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now still a good time to buy EA? Or are investors being too optimistic? Find out in our full research report, it’s free.
Why Does EA Stock Spark Debate?
Best known for its Madden NFL and FIFA sports franchises, Electronic Arts (NASDAQ: EA) is one of the world’s largest video game publishers.
Two Things to Like:
1. EBITDA Margin Reveals a Well-Run Organization
Investors regularly analyze operating income to understand a company’s profitability. Similarly, EBITDA is a common profitability metric for consumer internet companies because it excludes various one-time or non-cash expenses, offering a better perspective of the business’s profit potential.
Electronic Arts has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer internet business, boasting an average EBITDA margin of 35.3%. This result isn’t surprising as its high gross margin gives it a favorable starting point.
2. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Electronic Arts has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the consumer internet sector, averaging 27.6% over the last two years.
One Reason to be Careful:
Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Electronic Arts’s 3.7% annualized revenue growth over the last three years was sluggish. This wasn’t a great result compared to the rest of the consumer internet sector, but there are still things to like about Electronic Arts.
Final Judgment
Electronic Arts’s merits more than compensate for its flaws, and with its shares topping the market in recent months, the stock trades at 16.3× forward EV/EBITDA (or $199.34 per share). Is now a good time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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