Electronic Arts stock (NYSE: EA) is currently trading at around $130, similar to levels seen in late 2021. This is in contrast to the S&P 500, which has seen an increase of about 10% over the same period. The underperformance of EA stock can be attributed to a decrease in its P/S ratio to 4.6x from 7x in 2021, due to weakening consumer spending affecting its game bookings’ growth. Additionally, rising expenses and stiff competition in the industry have added to the challenges, leading to recent layoffs across major gaming companies.
Despite fluctuations, EA stock has seen returns of -8% in 2021, -7% in 2022, and 12% in 2023. In comparison, the S&P 500 has had returns of 27% in 2021, -19% in 2022, and 24% in 2023, highlighting EA’s underperformance in 2021 and 2023. In recent years, beating the S&P 500 has been challenging for individual stocks in the Communication Services sector and even for megacap stars like TSLA, MSFT, and AMZN. However, the Trefis High Quality Portfolio, comprising 30 stocks, has consistently outperformed the S&P 500 each year.
Amid the current uncertain macroeconomic environment with high oil prices and elevated interest rates, the question arises whether EA could face a similar situation as in 2021 and 2023 and underperform the S&P in the next 12 months or experience a recovery. It is anticipated that EA stock will likely see higher levels over time, supported by its revenue growth and acquisitions in 2021 which have contributed to a rise in revenue from $5.5 billion in 2020 to $7.7 billion in the last twelve months.
Electronic Arts’ operating margin has declined by 565 bps, leading to earnings expanding on a per-share and adjusted basis from $4.81 in 2020 to $6.47 in 2023. The company expects its revenue and bookings to be between $7.3 billion and $7.7 billion in 2024, with an adjusted EPS range of $6.80 to $7.30. Despite challenges such as slowing bookings growth and increased competition, Electronic Arts’ Valuation is estimated to be $151 per share, with a 14% upside from its current price based on a P/E multiple of 21x for fiscal 2024.
While Electronic Arts stock shows potential for growth, it is important to consider how its peers are performing in comparison. The company’s future prospects will be influenced by factors such as consumer spending trends, competition in the gaming industry, and its ability to innovate and adapt to changing market conditions. Investors may find value in monitoring EA’s performance relative to its peers and industry trends to make informed investment decisions.
