EA - Electronic Arts, Inc

[griezeman23]

It is "recurring" only until it isn't. These are not ~3-5 year contracts and consumer purchases are entirely dependent on successful, ongoing R&D. The gaming industry over the last year has proven themselves to be pretty bad at quickly responding to shifting consumer interests, and you can see what happens to the financials / stock prices when they miss a beat. In fact, the guys who got ran over the worst were the ones pitching the IP as "annuity-like".

 

As I said, in my previous post recurring was not the right word for MTX. Still would argue 80% of customers are repeat purchasers, which is "recurring" by definition. Is it an enterprise software subscription? No, but folks like myself (I bought FIFA blindly for 15 years straight) continue to return to purchase FIFA & Madden because they want the new year's "DLC", the rosters. You can worry about elevated churn due to poor gameplay (Frostbite), but FIFA 18 was EA's best selling FIFA year (24mn+) with its lowest metacritic score, 68. So I think that the risk there is low.

 

I would agree that EA/ATVI have not responded well to quickly changing customer demands (cough cough Fortnite). Seemingly, EA has reverted to bandwaggoning (Apex) but I'd argue its EA's first good non-sports game in quite sometime. I'd agree with your other points on any non-sports business and hence why I said the rest of earnings should trade in the low DDs. The non-sports gaming community is finicky to say the least and making a good game is not just due to capital allocation (Anthem, Battlefield V, Titanfall 2).

 

Your point about those pitching annuities is a good one, and one I have thought about for some time. First, I'd argue that I am not getting my faced rip-off like others in the last two years, given EA trades sub-20x now and not 25x like it did in 2017/18. Adjusted for its large cash balance, it trades at around 17x-18x, well below higher valuations seen before (25x+). At $120, it trades at roughly 20x + cash on the balance sheet, which is all I argue for (25x on sports, 12.5x on rest of business). Yes there is volatility potential in earnings, but I think much of this is priced in when EA trades below $100.

 

Second, I believe your main point of contention is the 25x multiple on the sports business, as the central question is: will UT continue to drive engagement? I don't think that CCG on sports needs to evolve much y/y to continue to grow (UT still growing 11% y/y ex-FX and FY19 struggled most likely as it included Belgium banning the fiat currency sale of FIFA points). I'd argue that FUT has a few more years to live since the EPL hands out FUT player cards along with its POTM awards, so I imagine UT still has at least a couple years of continued engagement. Could see this happen with UCL given the relatively new partnership there. Some academies in the UK are using FUT cards to help kids understand their weaknesses in real life. So I feel comfortable that risks to FUT declining in the very short term are low. There are risks, but I like EA here below 20x.

[griezeman23]

Schwab,

 

I'd agree that we are likely to squabble over multiples. Obviously, 25x is steep but I agree that sports is still undermonetized and LT growth of MSDs with further OM leverage in the LT (cloud gaming) make me feel like this is a good multiple (particularly, since EA traded that high before but Mr. Market can be wrong). Like you said, margins and growth will most likely be lumpy. Multiple here is just fine for me, not my best idea but I like it nonetheless.

 

Great point on skill reset.