Electronic Arts Inc. (EA, Financial) ended 2016 in the green. Moreover, the stock has been performing amazingly well this year as it is up almost 37% year to date. The global video game market is projected to grow at a robust rate and the company appears to be in a great position to benefit in the coming years.
Electronic Arts reported excellent fourth-quarter results on May 9. For the quarter, the American video game producer posted earnings per share of $1.81, outperforming the estimates by a significant margin of $1.06. Moreover, revenue came in at $1.53 billion, again surpassing the consensus by $440 million.
Most significantly, that figure signifies a surge of 17.7% compared to just 3% growth in the same quarter a year ago. The impressive growth was mainly due to the continued success of its "FIFA," "Battlefield" and "Star Wars" game franchises.
Moreover, gross profit and operating income for the fourth quarter were $1.325 million and $717 million, representing a year-over-year change of 22% and 34%. On the other hand, digital game sales represented 61% of the company's fourth-quarter overall net revenue, compared to 55% in the year-ago quarter.
For the full year, net revenue was $4.8 billion and operating income was $1.2 billion. Most significantly, these results allowed the video game company to deliver record operating cash flow of approximately $1.4 billion.
The company’s net revenues and operating cash flow continue growing at a strong rate, throwing light on a broader trend in the video game industry. Electronic Arts' gross margins are also improving due to the continuing rise of digital video game sales.
Due to the success of "Battlefield," the company released its first expansion pack in March and has plans to release three more expansion packs in the following quarters. The official release dates have not yet been disclosed, however.
Moreover, the company is also on its way to launch several new games this year, including "Star Wars Battlefront 2" and a new "Need for Speed." The company's foremost competitor, Activision Blizzard (ATVI, Financial), will be releasing "Destiny 2" and "Call of Duty WWII," two of the largest first-person shooter franchises available on the market, later this year as well.
As a result, Activision’s games may exert substantial pressure on Electronic Arts to distinguish its games from its competitors.
In fiscal 2017, the video game company repurchased $508 million worth of shares and plans to repurchase another $1.2 billion worth of shares throughout the next two years to return capital to shareholders.
Summing up
Since 2013, Electronic Arts has rewarded shareholders with impressive returns, and it looks like the company’s impressive streak will not end anytime soon. The company’s digital sales continue growing at a healthy rate, which will surely have a positive impact on gross margins as well as cash flow in the future.
On the other hand, the stock currently trades at a price-earnings ratio of 35, making it overvalued. Despite being overvalued, the stock still has tremendous upside potential since there is a strong outlook for the global video game market.
While existing shareholders should continue holding the stock for more gains in the future, investors looking to initiate a position in the stock should wait for a significant dip as it currently trades near its all-time highs.
Disclosure: No position in the stocks mentioned in this article.
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