Video game developer Electronic Arts is expanding quickly and appears to be headed for more success
One of the types of entertainment that is growing the fastest is video games. Today's games are much more immersive than they were even ten years ago, thanks to advancements in technology, which makes them competitive with other entertainment mediums like television. Middle-aged individuals who grew up with computer games continue to enjoy them, despite the shifting demographics of gamers. It makes sense that a recent report by consulting firm PwC predicted that the sector's total revenue would surpass £300 billion by 2028 when you factor in new technologies like virtual reality (VR) and the emergence of eSport. Electronic Arts (Nasdaq: EA) is one business that is already profiting from this.
One of the biggest video game production companies is Electronic Arts. It works with some of the largest franchises in the business. Sports FC, the Battlefield and Sims game series, and other sports franchises like the Madden series are among them. EA offers a subscription service that allows users to access a library of its best games for a monthly or annual fee, even though individual games are still available for purchase. Electronic Arts has a steady source of revenue thanks to this and the option to buy extra features for each game, like extra stadiums or team uniforms for its sporting events.
Competition is being repelled by Electronic Arts.
Because gamers are requesting more and more expensive spectacles, costs are increasing in tandem with sales. As EA discovered earlier this year when some of its most recent games were less successful than anticipated, resulting in a 20% decline in its share price, any mistakes can therefore have a big effect on the company's bottom line. Positively, however, growing expenses are making it more difficult for smaller studios, as some are closing and others are being acquired. This offers some protection against competition when paired with EA's powerful, recognizable brand.
Over the past five years, EA's revenue has increased by more than one-third, and since 2021, adjusted profits have increased by more than 50%. It is anticipated that over the next two years, revenue will continue to grow by 5% annually, and profits will more than double during that time.
At about 20%, operating margins are still robust, and the return on capital employed is about 17%. Other major game studios, like Take-Two Interactive, trade at about 26 times 2027 profits (despite having to postpone the most recent Grand Theft Auto franchise release). In contrast, EA trades at a very reasonable 17 times forecast 2027 earnings.
With its share price rebounding from the dismal start to 2025, EA also appears appealing from a technical standpoint. It's also trading above its 200-day and 50-day moving averages. I advise buying at the current price of £155, which is 19 to £1. I would set the stop loss at £105, resulting in a 981 total downside in that scenario.
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