Pause or Play With Electronic Arts?

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In the radically changing gaming industry, one player that has managed to sync itself to the dynamic environment is Electronic Arts (NAS: ERTS) . Being a gamer myself, I like to keep a close watch on the industry. This interest has pushed me to see how Electronic Arts is doing.

What's going on?
EA has gotten off to a very good start in fiscal 2012. Backed by increased product sales and better recognition of revenue, the top line surged 22.6% over the year-ago quarter. The bottom line skyrocketed 130% from the year-ago quarter because of both better performance of digital games and services and better cost management initiatives. The company's five-year revenue compound annual growth rate stands at a high 19.3%, and it also maintains a more than decent gross margin of 76%.

Very recently, EA acquired PopCap Games. This move has added greatly to the success of EA's digital business and enabled the company to enjoy a stronger position in the social gaming space. With 71.5 million monthly active users, EA is now the second largest social gaming company on Facebook after Zynga. The company is also coming up with some strong product offerings. Its newest offering Tiger Woods PGA TOUR 12: The Masters and Syndicate are set to get the gamers excited and may just change the rules of the game. In the forthcoming holiday season, both these products are likely to push the top line of the company even higher. The management is also expecting higher revenue than what it had previously expected due to revenue coming from PopCap and higher forecasted foreign exchange and distribution revenue.

It's evident that the company is charged up to take on competition, and if it ever decides to go for a debt financing to support its plans, it should be able to raise funds since currently EA is unlevered and maintains an impressive cash position of $1.17 billion.

The financial and the operational performances of EA have been good, no doubt. But how cheap is it?

Valuation
The company has been performing quite well. But the past performance cannot be the only thing that influences investors to dive right in. I personally feel the value-for-money concept is in the investor's mind all the time. At least, it's on my mind 24/7. This is why I feel a comparative landscape is a better way to judge an investment decision. Let's take a look at some important metrics.

Company

TEV/EBITDA

 

Forward Price to Earnings Ratio (NTM)

Electronic Arts 38.44 22.83
Activision Blizzard (NAS: ATVI) 8.15 15.96
Take-Two Interactive Software (NAS: TTWO) 18.37 11.77
GameStop (NYS: GME) 4.16 8.37

Source: S&P Capital IQ. NTM = next 12 months.

If we compare EA with its peers on the basis of the above trailing ratios, the stock may look like an expensive buy. The forward P/E tells a similar story. Now the question is, is EA worth 23 times forward earnings? I think it might be considering its turnaround and robust growth plans.

Foolish bottom line
EA looks more expensive than its peers. But that doesn't necessarily make it a bad stock. Next quarter, analysts expect EA to grow by 58% -- much faster than the breakneck expected industry growth of 31.2%. Keeping future expectations in mind, EA could very well be an intriguing stock.

  • To add Electronic Arts to your watchlist click here.
  • To add to Activision Blizzard to your watchlist click here.
  • To add Take-Two Interactive Software to your watchlist click here.
  • To add to GameStop to your watchlist click here.

At the time this article was published

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