Transcript for Ep#16 - Electronic Arts People Love Their Video Games
Welcome to episode 16. Today we are going to talk about video game maker, Electronic Arts which trades publicly on the NASDAQ under ticker symbol EA. Before we get started I want to let you know about our website at http://wwww.StockMarketIdeasPodcast.com. There you can take a look at a number of resources including a tracker to see how stocks have performed after each podcast episode where I’ve talked about a certain company. That’s StockMarketIdeasPodcast.com. Let’s get into Electronic Arts.
Thank you very much for joining me today for another episode of the stock market ideas podcast. I'm excited to talk about Electronic Arts today. Just in case you haven't heard of it, Electronic Arts is one of the largest video game makers in the world. It’s the second largest by revenue in North America and Europe. Chances are pretty good that you've at least heard of one or more of the games that it produces. These include the Battlefield series, Need for Speed, Command and Conquer, The Sims, and the huge variety of EA Sports games including Madden NFL and FIFA Football just to name a few.
This company was one of the few that probably saw more of a positive effect from the global pandemic in terms of sales as video game subscriptions increased.
This company has received a lot of attention recently from analysts and financial writers. It's important to be especially cautious as a lot of media commentary will focus on the relatively simple storyline of people staying home buying more video games. In all of this, it's easy to overlook the fact that much of the growth this company has seen even in the years leading up to now is more attributable to the loyalty that players feel to their games end of this system if repeated can be very powerful for many years to come. In a recent article on Seeking Alpha, Nikolaos Sismanis talks about Electronic Arts as a cash flow generation machine and he believes it is undervalued trading at a discount right now. With wide profit margins and relatively low capital expenditures, he talks about EA creating a consistent release cycle that builds anticipation and demand for new games and creating increasing growth. So if you’d like to take a look, that’s Nikolaos Sismanis on Seeking Alpha, and his newsletter is called Wheel of Fortune also on Seeking Alpha.
If we get into a couple of very noticeable financial strengths, there are a few things that are important to highlight. This company holds a lot of cash with a cash to debt ratio at around 5.5 and just under $6 billion in Cash and cash equivalents on the balance sheet. This makes sense when we look at the incredible roughly 75% gross profit margin which has been growing consistently for over 10 years. Another great point is the Return On Equity currently around 28% on a trailing twelve month basis. This seems to spike seasonally in the summer, but with relatively few assets to generate revenue, this number should historically remain healthy. Return On Invested Capital is a different way to look at how efficient a company is at creating a return, and this number is also very high at about 31% on a trailing twelve month basis. Against a Weighted Average Cost of Capital of just over 6% - a number that looks at the cost for a company to raise capital - Electronic Arts will continue to increase in value as long as these factors remain in place.
Where I think this company really shines is in the value it brings to its customers through incredibly well designed and executed gaming experiences. This is a competitive field, but one where high quality and established franchises like the ones published by EA will do very well and maintain strong customer loyalty over time. This is a business that builds a strong relationship with its customers, and at a price to earnings ratio of around 18.6%, this may be a business to consider investing in if you think this might be a good fit for you.
With the cash generation and profitability of this business, and the future potential for the gaming industry, I feel like this is an excellent business that has a long and prosperous future ahead of it under good management.
As always, I hope you have found this information helpful. Once again, please check out our website at StockMarketIdeasPodcast.com for some great resources. Do your own research before coming to any conclusions. Have a fantastic day and bye for now.