Electronic Arts | EA is Evil ?
Updated
EA SPORTS , It's in the game ?
Electronic Arts is famous for gathering top gaming franchises under its umbrella, like Need for Speed, Madden, good old FIFA, and Battlefield ( Do u remember Thanos Infinity Gems!) plus it has historically been awarded the undesirable title of most hated company on several occasions and has rightly been criticized for the following questionable aspects:
Releasing buggy unfinished games (it becomes game industry standard these days !)
Making pay2win practices instead of skill based gameplay ( thats life, the rich always win !)
Tons of microtransactions and various pricey expansions over the base games ( 69$ DLCs ! )
Feeding into gambling with endless loot boxes. This has been complained about to regulatory authorities multiple times in the past. EA has generally gotten off lightly in most cases and to this day rejects any comparison with gambling, but if you look at your kid you know how degen gamblers he becomes! DAD one more loot box plzzzzz! its just 500 bucks!
Acquiring game studios with a high turnover rate, instead of fostering creativity, some were quickly shut down if they did not achieve the desired success. Microsoft doing it too! ok
Recent developments in EA's portfolio are more cosmetic in nature and hardly something to move the needle. Among these is the FIFA rebranding, now called EA Sports FC following a split from FIFA. plus a Sims movie is reportedly in the works under the direction of Margot Robbie's film studio. With this move, EA follows in the footsteps of Nintendo, which benefited from significant ripple effects following their Super Mario Bros. movie. Whether this could have a similar outcome for EA remains questionable, which I feel is perceived less as a feel-good company compared to Nintendo. The pipeline holds little that is surprising, though College Football 25 is worth mentioning.
EA’s segment Live Services and Other contributes almost three-quarters to the company’s revenue, three times more than actual game sales. In EA’s 10K Report it says "live services include extra content, subscription offerings and other revenue generated outside of the sale of our full game sales. Our most popular live services are the extra content purchased for the Ultimate Team mode associated with our sports franchises and extra content purchased for our Apex Legends franchise"
it is almost a given that EA itself sees great potential in the use of AI, both to shorten development times, create personalized games, and explore additional monetization methods. However, these potential developments apply to all competing gaming companies as well and do not provide EA with a competitive edge. I would even argue that the opposite might be the case, especially since EA now faces one of the most potent publishers, Activision, directly at the source of AI developments following its acquisition from Microsoft.
The currently ongoing European Football Championship should be mentioned. The company’s outlook for this fiscal year suggests stagnation, although analyst consensus estimates still anticipate growth on the bottom line, while their top-line growth is also almost stagnant. I want to take these consensus forecasts, with just about double-digit earnings and therefore also free cash flow growth until 2027 (6-19 analysts), to foot a quick DCF on, just to get a rough feeling for EA’s intrinsic value. For this, I calculated EA’s WACC at 8.5%, as shown below. You might be wondering why I assume 0% terminal value growth, which is rather unusual. Initially, this was because of free cash flow conversions from adjusted net earnings that were 100% or higher, implying that there is no relevant reinvestment of earnings. That puzzled me and led me to take a closer look at EA’s cash flow statement (while the basis for my DCF approximation are analysts’ forecasts and implied FCF conversions carried forward).
I have developed scenarios and ranges that suggest EA’s stock price is within a reasonable valuation framework. it closely aligns with current consensus estimates, a WACC of 8.5%, and a terminal growth rate of 1.5%. Below, you will find a summary of these points.I don't see any red flags regarding valuation, which can be seen as a positive aspect and should offset the generally negative tone of this article
Based on this, I arrive at scenarios and ranges that make EA’s stock price appear within a reasonable valuation framework. Specifically, it aligns closely with current consensus estimates, a WACC of 8.5%, and a terminal growth rate of 1.5%. Below, you will find everything summarized. For this reason, I do not see any red flags regarding valuation, which can be interpreted positively and should balance out the largely negative tone of this article. Therefore, I rate EA a Hold.
As investors, we aim for game developers to be profitable and experience strong growth, but not at the cost of creativity. In fact, creativity is essential for achieving these financial goals in the long term. However, I don't see EA's current business model as sustainable, as it relies heavily on past successes. Despite significant profitability, the lack of a growth-oriented approach leads to stagnation. While EA remains a solid business, I am not in favor of their near-total focus on shareholder returns. Competitors like Microsoft with Activision and Nintendo with its iconic franchises seem better positioned. EA's profitability and fair valuation prevent me from rating it as a Sell, but its unclear strategy and stagnation also stop me from rating it as a Buy too so I aint sell but wont load more too
Electronic Arts is famous for gathering top gaming franchises under its umbrella, like Need for Speed, Madden, good old FIFA, and Battlefield ( Do u remember Thanos Infinity Gems!) plus it has historically been awarded the undesirable title of most hated company on several occasions and has rightly been criticized for the following questionable aspects:
Releasing buggy unfinished games (it becomes game industry standard these days !)
Making pay2win practices instead of skill based gameplay ( thats life, the rich always win !)
Tons of microtransactions and various pricey expansions over the base games ( 69$ DLCs ! )
Feeding into gambling with endless loot boxes. This has been complained about to regulatory authorities multiple times in the past. EA has generally gotten off lightly in most cases and to this day rejects any comparison with gambling, but if you look at your kid you know how degen gamblers he becomes! DAD one more loot box plzzzzz! its just 500 bucks!
Acquiring game studios with a high turnover rate, instead of fostering creativity, some were quickly shut down if they did not achieve the desired success. Microsoft doing it too! ok
Recent developments in EA's portfolio are more cosmetic in nature and hardly something to move the needle. Among these is the FIFA rebranding, now called EA Sports FC following a split from FIFA. plus a Sims movie is reportedly in the works under the direction of Margot Robbie's film studio. With this move, EA follows in the footsteps of Nintendo, which benefited from significant ripple effects following their Super Mario Bros. movie. Whether this could have a similar outcome for EA remains questionable, which I feel is perceived less as a feel-good company compared to Nintendo. The pipeline holds little that is surprising, though College Football 25 is worth mentioning.
EA’s segment Live Services and Other contributes almost three-quarters to the company’s revenue, three times more than actual game sales. In EA’s 10K Report it says "live services include extra content, subscription offerings and other revenue generated outside of the sale of our full game sales. Our most popular live services are the extra content purchased for the Ultimate Team mode associated with our sports franchises and extra content purchased for our Apex Legends franchise"
it is almost a given that EA itself sees great potential in the use of AI, both to shorten development times, create personalized games, and explore additional monetization methods. However, these potential developments apply to all competing gaming companies as well and do not provide EA with a competitive edge. I would even argue that the opposite might be the case, especially since EA now faces one of the most potent publishers, Activision, directly at the source of AI developments following its acquisition from Microsoft.
The currently ongoing European Football Championship should be mentioned. The company’s outlook for this fiscal year suggests stagnation, although analyst consensus estimates still anticipate growth on the bottom line, while their top-line growth is also almost stagnant. I want to take these consensus forecasts, with just about double-digit earnings and therefore also free cash flow growth until 2027 (6-19 analysts), to foot a quick DCF on, just to get a rough feeling for EA’s intrinsic value. For this, I calculated EA’s WACC at 8.5%, as shown below. You might be wondering why I assume 0% terminal value growth, which is rather unusual. Initially, this was because of free cash flow conversions from adjusted net earnings that were 100% or higher, implying that there is no relevant reinvestment of earnings. That puzzled me and led me to take a closer look at EA’s cash flow statement (while the basis for my DCF approximation are analysts’ forecasts and implied FCF conversions carried forward).
I have developed scenarios and ranges that suggest EA’s stock price is within a reasonable valuation framework. it closely aligns with current consensus estimates, a WACC of 8.5%, and a terminal growth rate of 1.5%. Below, you will find a summary of these points.I don't see any red flags regarding valuation, which can be seen as a positive aspect and should offset the generally negative tone of this article
Based on this, I arrive at scenarios and ranges that make EA’s stock price appear within a reasonable valuation framework. Specifically, it aligns closely with current consensus estimates, a WACC of 8.5%, and a terminal growth rate of 1.5%. Below, you will find everything summarized. For this reason, I do not see any red flags regarding valuation, which can be interpreted positively and should balance out the largely negative tone of this article. Therefore, I rate EA a Hold.
As investors, we aim for game developers to be profitable and experience strong growth, but not at the cost of creativity. In fact, creativity is essential for achieving these financial goals in the long term. However, I don't see EA's current business model as sustainable, as it relies heavily on past successes. Despite significant profitability, the lack of a growth-oriented approach leads to stagnation. While EA remains a solid business, I am not in favor of their near-total focus on shareholder returns. Competitors like Microsoft with Activision and Nintendo with its iconic franchises seem better positioned. EA's profitability and fair valuation prevent me from rating it as a Sell, but its unclear strategy and stagnation also stop me from rating it as a Buy too so I aint sell but wont load more too
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