Over the past six months, Electronic Arts’s shares (currently trading at $135.28) have posted a disappointing 6.3% loss, well below the S&P 500’s 5.2% gain. This may have investors wondering how to approach the situation.
Following the drawdown, is now a good time to buy EA? Find out in our full research report, it’s free.
Best known for its Madden NFL and FIFA sports franchises, Electronic Arts (NASDAQ:EA) is one of the world’s largest video game publishers.
EBITDA is a good way of judging operating profitability for consumer internet companies because it excludes various one-time or non-cash expenses (depreciation), providing a more standardized view 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 36.2%. This result isn’t surprising as its high gross margin gives it a favorable starting point.
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% over the last two years.
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, Electronic Arts grew its sales at a sluggish 4.1% compounded annual growth rate. 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.
Electronic Arts’s merits more than compensate for its flaws. After the recent drawdown, the stock trades at 13.3× forward EV-to-EBITDA (or $135.28 per share). Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
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