This Video Game Stock Is Poised to Rise

Despite a dip in stock price and a few worries from analysts ahead of its year-end earnings report, Electronic Arts (NASDAQ: EA) still appears attractive to investors. In this video clip from “The Virtual Opportunities Show” on Motley Fool Live, recorded on May 3, Fool.com contributor Demitri Kalogeropoulos looks at some of the factors fueling a positive outlook for the future.

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Demitri Kalogeropoulos: EA is the ticker symbol of the company I’m looking at this week. They’re reporting earnings in about one week, exactly one week actually next Tuesday afternoon, May 10. It’s an interesting story and a couple of different ways. Analysts are expecting EA to grow sales again year-over-year. This is on top of some really great growth they had last year. That’s good news. But EA has been doing a really good job in terms of flooding, just releasing really good content. A lot of popular engaging brands and franchises that Apex Legends, The Sims, their EA Sports catalog is really popular, got a lot of interaction from users.

But there are some big worries going into this report, which is why I think the stock is down a bit. The big one is that slump in digital entertainment that we’re seeing people in this phase of the pandemic, turning away from some of the things that they were doing during the pandemic. We’ve got a few points about that recently, Activision Blizzard (NASDAQ: ATVI) reported their earnings last week and they had really slowing growth and lost users in some of their big franchises like Call of Duty.

For example, engagement’s down, which is not a big surprise. We saw that from Netflix (NASDAQ: NFLX) too, people are spending a little less time, they’re less eager to pay up for even high-quality content as Netflix is spending more money on some of their content. That’s a fear I guess, that maybe that’s going to be showing up in these video game companies do in EA’s results.

But I like the stock for a couple of reasons. Because of that growth and because the video game industry is turning way more profitable, I think you’ve seen video games now that, now that they’re being directly delivered digitally, in most cases, for example, they are cutting out the retailer so that the video game developers are taking a lot more of those profits.

But the other thing is that the game itself has just become a much more valuable asset. It’s not just the thing that someone buys every year for $60 or whatever a year. People are signing up to these seasons there’s microtransactions. It’s much more of a partnership experience. In that way, it’s a lot like these cloud services companies that we talk about.

Look at what that has done to EA’s cash flow, and that’s what I like a lot about this business. If you look at this chart I’m showing here with their annual revenue over the last five years or four years or so, which is the same as this net bookings. Then how their annual operating cash flow has changed, has grown in that time.

Obviously, they got a big jump last year in bookings and they’re looking at around $7.5 billion this year, fiscal 2022. Next week they’re going to be closing that and starting the next fiscal year. Annual operating cash flow is up to $2 billion dollars a year right now and it was $1.5 and that’s a really good sign.

If EA can keep releasing content at a big, at the clip that they’ve been doing, then that’s a good sign then keep reinvesting all that cash in the business. That’s a really good formula for great returns, I think, for investors, but that’s a big if. Activision Blizzard had to delay two of their big releases out of this year, so that’s always possible. Then if gamers are less excited about spending time in those platforms. That could be pressure too.

Demitri Kalogeropoulos has positions in Activision Blizzard and Netflix. The Motley Fool has positions in and recommends Activision Blizzard and Netflix. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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