Benchmark analyst Mike Hickey maintains Electronic Arts Inc
Hickey thinks EA has a compelling medium-term growth opportunity, likely to build off anticipated growth in FY24, where he sees limited downside execution risk and where near-term business momentum should drive growth upside in 1Q24 versus the consensus view.
Like other video game companies in investment cycles, the investors will look through current tepid growth and into an emerging product cycle that should drive high growth in FY25-FY26, the analyst writes.
The anticipated incremental game catalysts (vs. FY24), including Battlefield FPS, Respawn: Star Wars (FPS), Respawn: Star Wars (Strategy), Dragon Age Dreadwolf (RPG), EA College Football (Sports Simulation), UFC/Boxing (Sports Simulation) Skate (Live Service), Need for Speed (Racing), Mass Effect (remaster), and Sims 5 (Simulation, est: Live Service, multiplayer, and UGC) back Hickey's optimism over medium-term material growth.
Incremental growth drivers should also have Live Service models attached, which deliver recurrent (sustained) growth subsequent initial launch.
EA should perform well in a turbulent market with crucial game drivers that appear recession resistant, with significant cash flow and profitability, and despite an "investment year," they are still expected to deliver growth.
Importantly, EA does not capitalize development expenses and therefore has no exaggerated development expense that must be amortized at a game's commercialization, which provides a more transparent approach to future profitability.
EA delivers significant FCF and distributes capital to dividends and share repurchases. EA operates within a consolidating industry. The balance sheet is strong. Top Live Service games include FIFA, Apex Legends, and Sims. EA's fundamentals performed well in the last reported quarter and should benefit EA's long-term growth opportunity.