Electronic Arts (EA, Financial) reported its fourth quarter earnings on May 10 and the company has been steadily gaining since its earnings report, adding 17.5% to trade at $75.80. The stock’s growth follows a fourth quarter and year-end earnings report that showed 25% growth in earnings per share from 2015. For the year, EPS was $3.14, up from $2.51 in 2015.
Andrew Wilson, Chief Executive Officer of Electronic Arts made the following statement in regards to the firm’s 2016 results:
FY 2016 was a phenomenal year for Electronic Arts. Our non-GAAP revenue, earnings and cash flow for the year were all at record levels and exceeded our guidance. It was a year of growth and milestones, demonstrating our unique ability to connect hundreds of millions of players across genres, geographies, and platforms to the games they love and to each other.
For the year, the company reported revenue of $4.566 billion with operating income of $1.018 billion. Showing steady and consistent growth, the company reported a revenue increase of 6% from 2015 and an operating income increase of 26%. Operating cash flow also grew steadily at $1.223 billion.
The quarter’s results were equally robust with Electronic Arts beating analysts’ expectations for both revenue and earnings per share. Revenue for the quarter was $924 million, up 3.1% from the comparable quarter and beating analysts’ estimate by $35.22 million. Fourth quarter earnings per share were $0.50, up 28% from the comparable quarter and beating analysts’ estimates by $0.08.
Beating expectations and delivering on the top and bottom line, the company also saw great demand for its products throughout 2016 and in the fourth quarter.
For the quarter, digital products reported the strongest growth. On a GAAP basis, digital revenue was 16% higher than the comparable quarter and packaged goods were 4% higher. On a non-GAAP basis, digital revenue was up 18% and packaged goods reported a decline of 28%. With digital as the firm’s main revenue driver it appears growth in the segment will continue to be a catalyst.
For the fourth quarter, the company saw the greatest non-GAAP sales growth in Playstation 4 and mobile platforms where its new Star Wars games were top sellers. The following chart from the company’s earnings report also shows the sales growth further delineated by product segment with extra content and full game downloads leading non-GAAP revenue.
For 2017 the company also has a full slate of games ready for release. On June 7 it will release Mirror’s Edge Catalyst, a new combat game. It also has a full lineup of sports games to be released in the second quarter including Madden NFL 17, NHL 17 and FIFA 17. Later in the year the company will also debut Battlefield 1, Titanfall 2, Mass Effect and more NBA LIVE and FIFA franchises.
In management’s comments following the earnings report, Blake J. Jorgensen, Chief Financial Officer of Electronic Arts, provided some additional details on the company’s success in 2016:
Using non-GAAP metrics, fiscal 2016 revenue at $4.57 billion was an all-time record. Our operating margin, at just 9.5% four years ago, was 28.5% this year, its highest ever. Gross margin at 71.4% and earnings at over $1 billion were also all-time records, as was operating cash flow at $1.2 billion. We were able to deliver these results despite significant FX headwinds, which impacted our top line by over $300 million.
Price analysis
With the full year results for Electronic Arts and the company’s near-term outlook, the stock appears to have further to climb. For 2016, earnings per share gained 25% and for 2017 EPS is expected to increase 11%. For 2017, non-GAAP revenue is projected to increase 7% and operating margins are expected to improve to 29.7%.
Free cash flow is steady and growing with $1.1 billion for 2016 and $1.2 billion expected for 2017. For investors this is a steady growth stock with substantial upside potential. When considering average earnings per share growth of just 15%, the company has a discounted cash flow value of $94.78 in comparison to its current trading price of $75.80.
Source: GuruFocus
The company’s P/E ratios also provide further evidence for its stock price growth. With a current forward P/E ratio of 21.93 and an average five-year P/E ratio of 148.03, the stock could be trading within a range of $76.75 to $518.11.
The company’s volatile earnings are a factor for its wide ranging P/E ratios and also put it in a higher risk allocation for investors also requiring higher monitoring overall. However, if the stock continues to achieve earnings growth at its three-year annualized pace of 128.32%, then it could likely increase to even higher than the upper range of its projections at $94.78.
In the current market, a number of leading guru investors are owners of the stock, adding further validity to its upside potential. Steve Mandel (Trades, Portfolio) owns 2.08% of the outstanding stock and Manning & Napier Advisors owns 1.77%.
On May 17 the firm will also be holding its annual investor day, which will provide even further insight into its near-term expectations for sales and earnings growth.
Disclosure: I do not own any shares of any stocks mentioned in this article.
