EA Had Another Record Quarter. So Why Did the Stock Drop?

Electronic Arts (NASDAQ:EA) announced its latest earnings result and saw its stock drop over 7% the next day. The company achieved record numbers on a few of its financials and even declared a new dividend, but investors were not happy with its forward guidance.

Man looking at screen upset.

Image source: Getty Images.

The good

EA had record trailing-12-month cash from operating activities of $2.04 billion, driven by strong growth from its live services division. In fact, the company’s entire revenue growth came from live services increasing from $3.36 billion to $3.9 billion over the last 12 months. With full game sales down because the release of FIFA 21 (EA’s No. 1 franchise) was pushed back to October, it was nice to see live services pick up the slack.

Apex Legends, EA’s relatively new Fortnite competitor, had a solid quarter as well. Executives stated on the conference call that the franchise is on track to generate $500 million in net bookings this year, and that they believe it can get to $1 billion in annual bookings soon. This is important not only because of the increase in revenue, but also because those sales are coming from another franchise. EA has long relied on FIFA and Madden to drive its sales growth, leaving the company’s success in the hands of two titles.

A chart of EA's living books in each fiscal year.

EA’s annual live bookings. Source: EA Q2 Earnings Slides. 

EA announced a new $0.17 quarterly dividend, which is around a 0.5% yield at the current share price. It also announced a two-year, $2.6 billion share repurchase plan as another way to return capital to its shareholders — one way to put the company’s estimated $6 billion cash reserve to good use.

The bad

Aside from growth investors who sold because of the dividend announcement, EA’s stock likely sold off because of weak guidance. The company guided for full-year revenue of $5.625 billion vs. Wall Street’s expectation of $6 billion (its fiscal year ends in March).

This disparity probably confused investors for two reasons. First, EA is getting a strong tailwind from the pandemic. This boost will likely continue at least through the winter. Two, the new Xbox and Playstation consoles have launched for the holiday season, which typically boosts overall sales in the gaming industry. So either EA is being very conservative with its guidance, or it thinks it will have an unexpected slowdown heading into the end of the year. Investors seemed less than thrilled about either possibility.

Why EA will be fine

EA investors shouldn’t be worried about holding shares in this business. Apex Legends is on pace for record bookings this year, 7 million new users joined FIFA this quarter, and Madden game sales are up 20%. The company continues to return cash to shareholders, has plans to launch a new game in its popular Battlefield franchise in 2021, and has plans to expand its reach in mobile games. With the stock down on near-term guidance woes, this could be a chance for investors to own a part of a quality business at a discount.

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