With shares of Electronic Arts Inc. (NASDAQ:EA) trading at around $22.80, is EA an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock's Movement
To immediately answer the question in the title, absolutely not. EA might have had several missteps over the past several years, and it's no secret that revenue has been a major problem, but the worst company in the world doesn't have a positive profit margin, a strong balance sheet, increased revenue guidance, a decent product pipeline, increased online exposure, increased social and mobile exposure, consistent annual earnings improvements, and a 75 percent increase in the stock price over the past year.
The big news for Electronic Arts right now is Fuse, which is a sci-fi shooter. The PS3 and Xbox 360 versions of Fuse have received mixed reviews. Below is a very quick breakdown of the most commonly reported positives and negatives:
NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!Positives:
Weapons
Co-Op Action
Negatives
Team A.I.
Confusing Tone
Yeah, that was quick. In regards to weapons, gamers have greatly appreciated the creativity, such as a mag shield that can absorb bullets and then fire them back at enemies.
While Fuse's potential success is still a guessing game, there is no doubt that Electronic Arts landing a deal with The Walt Disney Company (NYSE:DIS) for video gaming rights to Star Wars was a big splash. Star Wars has been a massively popular franchise for decades. What most people don't realize is that the franchise still has potential to grow, especially under Disney's leadership.
Electronic Arts is facing competition from free-to-play games, but its PopCap Games is now offering Plants vs. Zombies Adventures on Facebook (NASDAQ:FB). This is free-to-play, but in-game items are being sold. Other PopCap Games include Bejeweled, Bookworm, and Zuma. There are 42 other games as well.
The chart below takes a look at some basic fundamentals for Electronic Arts, Activision Blizzard (NASDAQ:ATVI), and Take-Two Interactive Software (NASDAQ:TTWO).
| EA | ATVI | TTWO | |
| Trailing P/E | 74.10 | 13.21 | N/A |
| Forward P/E | 16.29 | 13.92 | 15.09 |
| Profit Margin | 2.58% | 24.38% | -2.43% |
| ROE | 4.15% | 11.09% | -5.27% |
| Operating Cash Flow | 324.00M | 1.52B | -4.57M |
| Dividend Yield | N/A | 1.30% | N/A |
| Short Position | 5.30% | 1.90% | 17.40% |
Let's take a look at some more important numbers prior to forming an opinion on this stock.
T = Technicals Are Strong
For the worst company in the world, Electronic Arts sure is beating expectations when it comes to stock performance.
NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!| 1 Month | Year-To-Date | 1 Year | 3 Year | |
| EA | 27.60% | 57.78% | 75.29% | 44.91% |
| ATVI | -6.39% | 35.56% | 23.58% | 38.56% |
| TTWO | 2.93% | 46.59% | 48.07% | 46.33% |
At $22.80, Electronic Arts is trading above its averages.
| 50-Day SMA | 20.13 |
| 200-Day SMA | 17.16 |
E = Equity to Debt Ratio Is Strong
The debt-to-equity ratio for Electronic Arts is stronger than the industry average of 0.30.
| Debt-To-Equity | Cash | Long-Term Debt | |
| EA | 0.25 | 1.68B | 559.00M |
| ATVI | 0.00 | 4.62B | 0.00 |
| TTWO | 0.57 | 402.50M | 335.20M |
E = Earnings Have Improved
Earnings have consistently improved on an annual basis. However, revenue has been very inconsistent.
| Fiscal Year | 2009 | 2010 | 2011 | 2012 | 2013 |
| Revenue ($) in millions | 4,212 | 3,654 | 3,589 | 4,143 | 3,797 |
| Diluted EPS ($) | -3.40 | -2.08 | -0.84 | 0.23 | 0.31 |
Looking at the last quarter on a year-over-year basis, revenue and earnings both declined. On the other hand, revenue and earnings made substantial improvements on a sequential basis.
| Quarter | Mar. 31, 2012 | Jun. 30, 2012 | Sep. 30, 2012 | Dec. 31, 2012 | Mar. 31, 2013 |
| Revenue ($) in millions | 1,368 | 955 | 711 | 922 | 1,209 |
| Diluted EPS ($) | 1.20 | 0.63 | -1.21 | -0.15 | 1.05 |
Now let's take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?
Conclusion
Investors are frustrated with Electronic Arts due to its inability to come up with new titles. Retail gaming sales have also been weak. Another negative is that Electronic Arts is trading at 74 times earnings whereas the industry average is only 7 times earnings. That said, all the positives mentioned earlier should also be considered.
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