Fundamental analysis of EA

1. ELECTRIONC ARTS
FUNDAMENTAL ANALYSIS 9-10-2020
TICKER:EA
BY PASHTUN

2. BUSINESS (1)
• Develop, publish and deliver games for PC, consoles and
mobile phones
• Games owned: Battlefield, Sims, Apex Legends, Need for speed,
plants vs. zombies
• Lincese from others: FIFA, Madden NFL, Star Wars
• Largest and most popular game: FIFA (12 pct net revenue)

3. RISK FACTORS
• Main risk is competition
• May lose licensing rights for certain games, for example, Star
wars from Disney
• COVID-19 may disrupt operations
• Business depens on availability of consoles/PC’s
• Products may not meet development schedules

4. INCOME
STATEMENT
• Revenue has been
inconsistent over the
years; with losses in 5 out
of 10 years; however a
profit in 3 out of 4 of the
most recent years
• Cost of sales have gone
down
• Gross Margin is very high
at 74.6%
• For some reason, EPS
grew very fast from 2019
to 2020; and is now down
in 2021
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 TTM
Revenue USD Mil 3,589 4,143 3,797 3,575 4,515 4,396 4,845 5,150 4,950 5,537 5,787
Revenu year over year
change in % -1.78 15.44 -8.35 -5.85 26.29 -2.64 10.21 6.30 -3.88 11.86 20.68
COGS 41.77 38.57 36.56 37.68 31.65 30.80 26.79 24.80 26.71 24.72 25.40
Gross Margin % 58.2 61.4 63.4 62.3 68.3 69.2 73.2 75.2 73.3 75.3 74.6
Operating Income USD
Mil -168 62 84 -3 945 898 1,224 1,434 1,010 1,450 1,505
Operating Margin % -4.7 1.5 2.2 -0.1 20.9 20.4 25.3 27.8 20.4 26.2 26.0
Net Income USD Mil -276 76 98 8 875 1,156 967 1,043 1,019 3,039 1,983
Earnings Per Share USD -0.84 0.23 0.31 0.03 2.69 3.50 3.08 3.34 3.33 10.30 6.80

5. BALANCE
SHEET
• Equity has grown steadily
over the years
• Debt has been reduced,
debt/equity only 0.05
• Great current ratio of 2.61
Balance Sheet
Items (in %) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Latest
Qtr
Total Current
Assets 61.53 47.51 45.86 54.90 60.52 61.76 67.36 69.94 71.24 58.65 59.29
Total Assets 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
Total Current
Liabilities 40.60 38.61 37.81 41.81 45.19 34.33 31.29 29.02 25.29 23.97 22.76
Long-Term Debt 9.82 11.03 10.15 14.03 12.83 11.56 11.10 3.57 3.52
Total Liabilities 47.97 55.24 55.29 57.63 50.61 51.83 47.40 46.47 40.48 32.86 31.04
Total
Stockholders'
Equity 52.03 44.76 44.71 42.37 49.39 48.17 52.60 53.53 59.52 67.14 68.96
Current Ratio 1.52 1.23 1.21 1.31 1.34 1.80 2.15 2.41 2.82 2.45 2.61
Quick Ratio 1.29 1.04 1.04 1.13 1.22 1.68 2.03 2.29 2.67 2.33 2.52
Debt/Equity 0.22 0.25 0.24 0.29 0.24 0.22 0.19 0.05 0.05

6. CASH
FLOW
STATEMEN
T Time CFO IO FO Capex FCF
2016 1.22 -0.48 -0.31 -93 1.13
2017 1.38 -0.76 -0.53 -123 1.26
2018 1.69 0.62 -0.64 -107 1.58
2019 1.55 0.17 -1.25 -119 1.43
2020 1.8 -1.36 -1.36 -140 1.67
TTM 2.02 -0.42 -1.12 -130 1.88
- Slowly and
consistently
growing FCF
- Increasing CFO on a
consistent basis
- In 2017 they bought
Respawn
Entertainment
($273 million), in
2018 Gamefly Inc.
($50 million)
- They lost money in
investments in 2018
and 2019
- They are buying
back stocks neatly,
as seen in financing
activities

7. FORECAST BY ANALYSTS
• Revenu is forecast to grow 16% anually, however earnings are
expected to decline on the short term

8. STOCK
PERFORMANCE
• Return 96% in 5
years vs 72.50% S&P
500
• Huge drop in stock
performance in
2018

9. VALUATION DCF GURUFOCUS
• Projected FCF $73, current price $127, ratio 127/73=1.7
• Median ratio over the last past 10 years = 2.63
• Industry median is 2.08

10. VALUATION
PETER
LYNCH P/E
GRAPH IS INCOMPLETE,
BUT EA SEEMS MORE
EXPENSIVE NOW THAN IN
THE PAST

11. COMPETITORS
• Best performing stock based on
past performance (revenu, FCF
growth) and future is TTWO out
of the stocks with positive
earnings. Second best is ATVI in
past performance, EA in future
growth.
• EA is the most efficient company
• TTWO is the most expensive
company, then depending on
metric, either ATVI or EA
• By far the best returns in past
performance by TTWO
Key ratios ATVI EA UBI TTWO
Market Cap 60.34B 37.35B 11.74B 18.49B
Revenue YY 38% 21% -14% 54%
Past growth earnings 5yr
avg 16% 23% -9% 63%
Projected growth earnings
in % 6% 16% 42% 19%
ROE 13% 26% 19% 17%
Current Ratio 3.02 2.61 1.71 1.72
Debt/Equity 0.2 0.05 0.89 0
FCF YY in % 3.38 16.04 181 25
FCF 5Y in % 0.3% 14.4% N/A 46.26%
EV/EBIT 27.9 21.9 238.3 33.6
P/E 33.51 18.3 N/A 40.9
PEG 5.8 1.1 N/A 2.1
P/B 4.4 4.6 7.4 6.6
Diff intrinsic Value in % 38% 45% -2% 43%
Return last 10 year 631% 736% 974% 1845%

12. DISCUSSION
• Strenghts
• Has the best return on equity, good stable growth of FCF, good future growth of
revenu and is relatively cheap based on conservative metrics
• Competitive advantage may be Apex Legend; a rival to fortnite
• Have a loyal pool of customers through FIFA
Weakness
• Inconsistent revenu’s and eventhough revenu is forecast to grow, earnings and
earning per share is expected to decline next year
• Poor stock performance compared with competition
• More dependant on licensces than the competitors