After an 8% year-to-date decline, at current levels, we believe Electronic Arts Stock (NYSE: EA) looks undervalued. EA stock has fallen from around $135 in early January to under $125 now. The 8% year-to-date drop for EA is much better than the -20% returns for the broader S&P500 index.
Looking further ahead, EA stock is up 58% from levels seen at the end of 2018. This marks an underperformance against some of its peers, with Microsoft share increasing by more than 2.5x and Action Activision Blizzard up 67%. The S&P500 index rose 55% during this period.
This 58% rise in EA shares since the end of 2018 was driven by: 1. Electronic Arts Revenuewhich grew 41% to $7.0 billion in the last twelve months from $5.0 billion in 2018, 2. the company’s P/S ratio, which increased 14% to 5.1x trailing revenue, from 4.5x in 2018, and 3. a 6% drop in its total shares outstanding to 285 million currently. This means the company’s revenue per share increased 50% to $24.55 today from $16.32 in 2018. Our interactive dashboard, Why was the Electronic Arts stock moved?has more details.
Electronic Arts made a wave of acquisitions with Playdemic, Codemasters, Metalhead Software and Glu Mobile
Electronic Arts has a debt of only 2 billion dollars, while its liquidities exceed 3 billion dollars. It increased its adjusted net margins to 29% in fiscal 2022 from 26% in 2018. It also spent $5 billion on stock buybacks between 2018 and 2022, driving its stock down 6%. . Overall, the company appears to be on a solid growth trajectory with expanding margins and healthy finances.
Although Electronic Arts appears to have a good outlook, it is facing headwinds due to the current weakness in broader markets. The S&P500 has now entered bear market territory with mounting concerns about slowing economic growth given high inflation, Fed action and supply chain disruptions. These factors may also impact the performance of EA shares.
However, we find EA stock to be currently undervalued and estimate Valuation of Electronic Arts at $155 per share, reflecting a 25% upside from its current market price of $124, implying that investors are likely better off buying EA stock during the recent decline for solid long-term gains term. At its current levels, EA stock is trading at just 17 times forward adjusted earnings, compared to the past three-year average of 22 times, making the stock attractive from a valuation perspective.
Although EA’s stock looks undervalued, it’s worth seeing how Electronic Arts Peers price on the measures that matter. You will find other useful comparisons for companies in all sectors on Peer comparisons.
In addition, the Covid-19 crisis has created many price discontinuities which can provide interesting trading opportunities. For example, you’ll be surprised how counter-intuitive stock valuation is to Activision Blizzard vs. Gilead Sciences
With rising inflation and higher Fed interest rates, among other factors, Electronic Arts stock has fallen 8% this year. Can it fall more? See how far can Electronic Arts stock go comparing its decline to previous stock market crashes. here is a summary of the performance of all stocks during previous stock market crashes.
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