If you've wondered when Electronic Arts Inc. (NASDAQ: EA) stock will rally to new highs, the answer is now. The market for this stock has been incredibly volatile in the face of solid results and institutional holding and just produced another solid result.
The news has the stock up more than 5% in early trading and firing a solid technical signal. The signal includes confirming support at critical levels, support indicated by two significant moving averages and bullish crossover in the indicators that all point to a rally and higher prices.
Regarding institutional activity, institutions own more than 90% of this stock and added to their holdings in Q3 and early Q4. The largest shareholder is Vanguard at just under 10%, held mainly by funds, with the Saudi PIF in close second. The Saudi PIF nearly doubled its stake in the company earlier this year and owns just under 10%. In the words of PCGamer writer Rich Stanton, the reason why is no real mystery.
Electronic Arts business boomed in the wake of the pandemic and has a robust outlook, an attractive diversification away from oil for the oil-rich nation.
Electronic Arts surges after strong Q2
Electronic Arts had a solid Q2, with revenue up 9.3% and slightly ahead of the consensus figures. Revenue strength is driven by stable performance in live services, the company’s largest revenue stream, aided by a 4% increase in net bookings.
Bookings are strong on performance in sports franchises such as Madden NFL and the new EA Sports FC 24. The successful launch of FC 24 is a significant win for the company as it replaces the highly successful FIFA soccer franchise and claims 14.5 million active users within the first month of service.
Margin news was also good. The company’s net income margin improved by more than 500 basis points to deliver $1.47 in adjusted earnings. It's up 68% compared to last year and outpaced the consensus by 1,400 basis points. Guidance also increased with the largest changes to the bottom line. The company is now expecting bookings in a range bracketing the Insidertrades.com consensus figures with a wider-than-expected margin.
Cash flow is an important part of the Electronic Arts story. The company’s year-to-date (YTD) cash flow allowed the repurchase of shares, dividend distributions, and debt reduction with a minor impact on total cash. The takeaway is that assets are rising, and shareholder equity improved to help drive the market higher. The dividend isn’t much, about 0.6%, but compounded by the repurchases, which more than double the effective yield on an annualized basis. More importantly, share repurchases offset issuances by a wide margin and resulted in a 2.5% year-over-year (YOY) reduction in share count.
Analysts put the floor in the EA market
Analysts' sentiment toward EA slipped over the last year, with the price target falling about 6%, but that is the worst data. The analysts rate the stock a firm "moderate buy," with a price target nearly 15% above the current action and steady since early in the year. Recent activity includes four boosted price targets and an upgrade to "buy" that all see the stock trading above the consensus. Assuming this develops into a trend, the market for EA should follow the analysts' lead and move higher.
The stock is down from the post-pandemic highs but shows solid support at the analysts' low price target of $112 and an upswing in the most recent action. Now, the market is moving up from a critical support level and showing a strong bullish signal with the $140 level in sight. If the market follows through on this signal, it should increase to $140 soon and possibly set a new one-year high before 2024.
