Electronic Arts Stock Report Recommendation

NASDAQ: EA
As of 11/05/2021
By: Ethan Eddington
I RECOMMEND A BUY RATING ON EA STOCK
 Introduction
My name is Ethan Eddington and I’m a student at Brigham Young University – Hawaii
studying Accounting. I am also doing two minors in Mathematics and Visual Arts. My hobbies
include skateboarding, hiking, and enjoying living in Hawaii. I am studying to become a CPA and
hopefully start my own accounting practice in the future.
The purpose of this report is to analyze Electronic Arts stock and determine whether to
buy, hold, or sell according to the history, current standing, and future outlook of the company.
Business Summary
Electronic Arts Inc. is a video game company within the communication services sector in the
electronic gaming and multimedia industry and their stock is traded on the NASDAQ stock
exchange. EA is based out of Redwood City, California and employs 11,000 full time employees.
EA’s index membership consists of the Nasdaq 100, Russell 1000, Nasdaq Composite, S&P 500
Communication Services Sector, Russell 3000, and S&P 500. They develop games across many
genres to appeal to as many customers as possible. A few of their most famous titles are
Battlefield, The Sims, Apex Legends, Need for Speed, Plants vs Zombies, and a roster of well-
known sports titles like FIFA and Madden NFL.
2021 Financial Results and Operating Highlights
These highlights from 2021 show the huge player base of EA games. Because EA has such a
large reach, their position in the market for electronic gaming is very stable. Their games will
continue to be played each year as new iterations come out and returning customers continue
to purchase them. This is a good sign for investors who are concerned with risky (highly volatile)
stocks because it means that EA will not suddenly lose its market share and they are less likely
to make risky moves that jeopardize the entire company.
Stock Charts (1-Year, 5-Year, 10-Year, respectively)
 One of the things that stood out to me in my analysis was how consistently EA’s stock
price has risen since the release of the Xbox One in 2013. This console is what most EA games
are played on such as Madden NFL and FIFA. The Xbox One console has been one of the few
gaming consoles to become popular and stay that way over long periods of time. You can see
an obvious rise in stock price ever since its release. Another important release was the new
Xbox Series X that came out in 2020 and we see another rise in EA’s stock price at this time.
Certain one-off games such as APEX Legends also have corresponding effects on the stock price
of EA.
In the long run, EA stock has risen considerably ever since 2013 in relation to the release
of complimentary products like gaming consoles and technological advances that make their
games more desirable to play. An overarching trend in the gaming industry has been a steady
rise in popularity as technology improves and the overall quality of the gaming experience. EA
stock reflects the market as it is on the rise.
This stock has performed very well over the last 13 years with rising returns in the long
run. Certain periods of time such as complimentary product releases as well as Covid contribute
to their stock booms, so I recommend buying this stock in these types of situations. Obviously a
complimentary good has a positive effect on EA stock price, and Covid caused people to spend
more time inside which means more time spent on in-home entertainment on a global scale. I
think the consistency of this stock this has to do with the business structure of EA as a company
and the rise in popularity of gaming in general. EA is known to create franchise games meaning
they partner with organizations such as the NFL, FIFA, and NHL who have tons of fans so they
can create demand for their titles that will remain consistent with the popularity of the sports
that the games simulate. They do a great job of constantly improving and evolving their games
in efforts to excite players of previous games and cause them to want to purchase the newest
version. My knowledge of this comes from years of experience talking with friends about EA
games and playing them myself. Just about everybody in the United States under 30 is aware of
their titles and have played them at some point. This company is almost too big to make
mistakes that would drive their stock value down permanently. I estimate the value of this
stock going up incrementally in the future.
Beta Analysis
Risk Free Rate: Low=2.25%, High=2.50%

Market Risk Premium: 7.96

CAPM: 9.561%

ri = rRF + (RPm x bi)

= 0.0246 + (0.0796 x 0.892)
= 0.0956 or 9.56%
The expected return on this stock as of now is 9.56% based on historical data. The S&P
500 average annual return typically hovers around 7% so this is promising for EA. Investors
should expect returns around 9.56% when investing in EA in the future.
Estimated Intrinsic Value of Stock 2022
P0 = D1 / (rs-g) or Stock Price = next year’s dividend / (expected rate of return – growth rate)
P0 = 6.8 / (11.60% - 6.76%) = 1.40
The intrinsic value of the stock for next year is 1.40
According to gurufocus.com, the range of intrinsic value in the past 10 years is from 0.82
to 25.72 with a median of 2.68. My estimation is within that range and slightly below it which
seems plausible.
Current Capital Structure
Debt to Equity Ratio

The current (and historical) debt to equity ratio for EA is promising. The fact that it is so
low tells us that the company has chosen or hasn’t needed to finance its growth with debt.
Although this is good news, the industry average is actually lower than EA and means that in
comparison, EA uses more debt than its competitors to finance its growth. This shouldn’t be a
huge concern to investors though because the variance is minimal.
I would venture to say that EA should try and maintain their debt to equity ratio as of
now because they are landing right around their historical average and their growth has been
strong as of late. If it aint broke, don’t fix it.
 Free Cash Flow (3 Year Chart)

Aside from 2019 (the red) EA has had growth in free cash flow over the past 3 years.
This is a good sign because it means that the company is generating more cash than it is using
for investing and operating activities. Of course, we can see that in late 2019 to early 2020 that
wasn’t the case and the reason being Covid-19 and the economic depression that came with it.
Overall, the company’s free cash flow is on track to continue to grow, and investors should take
note of this.
Company plans/investments for the next quarter/year
Plans for EA in the near future includes 4 new game titles with one of them (Battlefield
2042) being a continuation of a previously successful game franchise. These games are being
released as soon as November of 2021 and some have yet to have a release date assigned to
them. Because they are on their website under “coming soon” we know that tentatively they
will release these games within the next year, two years at the most.
According to fool.com/investing, EA has had a record year in 2021 and seeks to expand
its player base within the real of their sports games. This means the company plans to double
its players to 500 million over the next five years which is a long-term plan but will begin this
year. This is all within EA Sports, which doesn’t include many of their other gaming titles.
Specifically, EA plans to invest heavily in its largest and most popular game, FIFA.
EA has also invested in events such as the 2021 Pro Bowl for Madden which brough famous
American Football players into a tournament playing their Madden NFL football game in a
tournament. This event was very successful, and EA will look to capitalize on these types of
promotional events and invest heavily in them.
Conclusion
I would recommend investors to either buy or hold this stock if they are looking for a
long-term investment. I say this because the short run volatility of the stock can be high but in
the long run the stock returns have consistently risen which I believe is due to the nature of the
gaming industry as well as the consistent release of popular gaming titles.
In the short run this stock is typically volatile which is common, and I would say that if
you are willing to take higher risk in hopes of higher rewards then this stock could be an option.
Overall, I would say stick to long run investments with this company.
The profit margin for EA stock has been high historically speaking. This shows me that
the company is able to achieve high sales while keeping overhead costs low. This is a good sign
for investors because it shows them that the company they are investing/invested in is efficient
when it comes to income vs expenses for their products.
Most of the analysts I have seen are recommending buying this stock and I agree
wholeheartedly. Just about everything included in this report has been positive and reflects
positive growth and efficiency from Electronic Arts in the past.
 Works Cited
EA Annual Report: https://s22.q4cdn.com/894350492/files/doc_financials/2021/ar/Annual-
Report-(2021).pdf
Stock Charts and Statistics: https://finance.yahoo.com/quote/EA/
CAPM Data: https://finbox.com/NASDAQGS:EA/models/wacc
CAPM Data: https://financialmodelingprep.com/discounted-cash-flow-model-levered/EA
Capital Structure Data: https://www.gurufocus.com/term/deb2equity/NAS:EA/Debt-to-
Equity/Electronic%20Arts
Free Cash Flow Chart: https://www.wsj.com/market-data/quotes/EA/financials/annual/cash-
flow