Electronic Arts: Net Bookings And Cash Flow Growth Encouraging (NASDAQ:EA)

Investment Thesis: Electronic Arts is seeing an impressive rebound with growth in net bookings and an improving cash flow position.

In a previous article back in May, I made the argument that Electronic Arts (NASDAQ:EA) could see modest growth in the short to medium-term due to concerns over a slowdown in net booking growth.

Since then, the stock has descended to a price of $119.18 at the time of writing:

The purpose of this article is to assess whether Electronic Arts has the ability to see continued growth from here, taking recent performance into consideration.

Performance

When looking at the most recent earnings results for Electronic Arts, we can see that Electronic Arts saw an 8% increase in net revenue and a 32% increase in diluted earnings per share.

When looking at net bookings by quarter, we can see that the same is up to $1.578 billion in Q1 2023 from $1.299 billion in Q1 2022 – representing 21% growth from that of last year.

Additionally, while I had previously cautioned over the fact that net bookings had fallen from Q3 to Q4 last year – we can see that Q4 2022 marks the first quarter in that year where net bookings were actually up from the same quarter in 2021 (from $1.751 billion to $1.946 billion).

Moreover, when looking at the boost in net bookings for the most recent quarter as compared to last, a significant driver behind the growth was once again an acceleration of EA SPORTS FIFA net bookings which delivered a record performance for the franchise in the quarter.

Aided by this was the release of the Star Wars Jedi: Survivor title, which helped to offset the lower performance of Apex Season 17.

Additionally, we also notice that while net bookings for the live services and other segment was up by 7% in constant currency for Q1 FY24 as compared to Q1 FY23, we can see that net bookings for the full game segment is up by 152% over the same period.

This is quite encouraging, as it indicates that Electronic Arts is becoming less dependent on speculative revenue from microtransactions and in-game purchases from live services and a boost in full game net bookings conversely allows for a more guaranteed revenue stream.

Additionally, when looking at a breakdown of full game and live services on a quarterly basis, we can see that full game net revenue is up by 30% from $341 million in Q1 FY23 to $443 million in Q1 FY24.

From a balance sheet standpoint, we can see that the quick ratio of Electronic Arts (calculated as cash and cash equivalents plus receivables all over total current liabilities) has increased to just under 1 – indicating that Electronic Arts possesses virtually sufficient liquid assets to meet its current liabilities.

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Source: Figures sourced from Electronic Arts Q1 FY24 Earnings Release. Quick ratio calculated by author.

In addition, we can also see that over the course of the past year, both operating cash flow and free cash flow have comfortably rebounded into positive territory, with $359 million and $314 million respectively in the most recent quarter.

My Perspective

As regards my take on the above results and the implications for the growth trajectory of the stock going forward, I am quite impressed at the fact that Electronic Arts has managed to significantly bolster full game net bookings while concurrently improving its cash position.

In addition, the fact that Electronic Arts has managed to boost its net bookings on that of last year over the past two quarters indicates that demand is rebounding significantly.

When looking at the company’s 10-year earnings trajectory, we can see that the P/E ratio and earnings per share is trading at a similar level to that seen in 2018.

Moreover, we can see that the stock is trading at a similar level to that seen at the beginning of 2018.

In this regard, I take the view that Electronic Arts is currently fairly valued at the $120 mark.

Risks and Looking Forward

Going forward, I take the view that if Electronic Arts can continue to bolster full game net bookings and continue to maintain a healthy cash position – then earnings could have the capacity to rise further and this could see the stock move higher.

In terms of the potential risks to Electronic Arts at this time, we have yet to see whether the recent pulling of the FIFA gaming title and rebrand to EA Sports FC will ultimately impact net bookings and revenue. We have seen that the FIFA gaming title continued to be a key driver of net booking growth in Q1, and it cannot be said for certain whether demand will continue to remain buoyant after the rebrand.

With that being said, there has been anticipation of the rebrand to EA Sports FC for quite some time, and we have continued to see strong demand for the FIFA gaming title up until now. Moreover, with the dynamics and quality of the game reportedly remaining much the same as the original FIFA series – I take the view that Electronic Arts can continue to boost net bookings with EA Sports FC going forward.

Conclusion

To conclude, Electronic Arts has seen significant growth in net bookings in the last two quarters (as compared to the same quarter in the previous year). The improvement in the company’s cash flow is also encouraging. I will be paying attention to the upcoming quarter to see whether net bookings see further growth – particularly on the back of the EA Sports FC release. If this proves to be the case, then I would take a more bullish view on the stock.