Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Is Electronic Arts making money?

Gamers and value investors ask is Electronic Arts making money because of the incredible success of its rival Epic Games’ Fortnite. In particular, many people will wonder how safe Electronic Arts (NASDAQ: EA) is.

Others ask if Electronic Arts or EA is a value investment because it can cash in on the multi-player shooter game craze. Shooter games in which online players form teams to compete in online Battle Royales are hot right now.

In fact, the most popular Battle Royale; Fortnite, could be the hottest entertainment franchise in the world now. Notably, Epic Games claims Fortnite has 250 million players worldwide.

Hence, Fortnite has a larger audience than Netflix (NASDAQ: NFLX); which claims to have had 139 million subscribers worldwide in January 2018. In addition, Fortnite generated $3 billion in profits for the privately held Epic Games in 2018, Tech Crunch claims.

Is Electronic Arts a Value Investment?

Under those circumstances, video game makers could be a value investment. Notably, Electronic Arts stock was trading at $98.21 a share on April 8, 2019. Meanwhile Netflix stock was trading at $362.69 a share on the same day.

Thus my value-investment argument for EA is simple. Video game makers are cheaper than streaming services but they have a larger audience.

Naturally, some people will ask why is Netflix more expensive than Electronic Arts? Strangely, the entertainment habits of different generations provides the answer to that question.

Why Netflix is more Expensive than EA

First, ask yourself who watches television, Netflix’s product. The answer is older people mostly Baby Boomers; those between 54 and 74. Moreover, older people are more likely to own stocks.

For instance, Gallup estimates 62% of Americans between 50 and 64, and 54% of those over 65 own stock. In contrast, just 31% of people under 29 own stock.

Consequently, these numbers affect EA and Netflix’s price. Netflix’s stock price is high because Baby Boomers are more likely to watch TV own more stock. Meanwhile, Electronic Arts’ price is lower, because most of those who buy stocks are unfamiliar with its products.

Why Electronic Arts Could be a Value Investment

Electronic Arts is potential value investment because game industry observers think its Battle Royale; Apex Legends could be more popular than Fortnite.

For instance, Apex Legends attracted 50 million users in the month after its launch in February 2019, Esquire estimates. Impressively, Apex Legends had one million players eight hours after going live on 4 February 2019 and 2.5 million players in its first day on line.

Moreover, EA CEO Andrew Wilson boasts that Apex Legends had 600,000 peak and current players and nearly three million unique users on 4 February 2019, VG 27/24 reports. Thus, Apex Legends was attracting interest before its premier.

In addition, Apex Legends was reportedly the most watched game on Twitch in February 2019, VG 24/7 estimates. Twitch is the most important advertising venue for video games because it lets gamers watch other gamers at play. In detail, Apex Legends had 232,000 Twitch Viewers on 6 February 2019.

Apex Legends’ Audience is larger than Cable Television’s

Therefore, Apex Legends has an audience that exceeds any of the US cable television channels. For instance, the most popular US cable network Fox News had 1.392 million viewers in March 2019, Statista estimates.

Plus Wilson’s estimates for Apex Legends’ peak and current users exceed those of two top 10 US cable networks. To explain, Statista calculates the History Channel and the Halmark Channel each had 564,000 daily viewers in March 2019. Conversely, Wilson claims Apex Legends was attracting 600,000 peak users on 6 February 2019.

Furthermore, Apex Legends audience also exceeds that of broadcast television. Impressively, Endgadget estimates 25 million people played Apex Legends in its first live week. In contrast, the most popular US broadcast show; CBS’s Big Bang Theory, had 12.886 million viewers on the week of 8 April 2019, TV Series Finale calculates.

Value investors should take notice because EA has at least two other shooter games, Anthem and Command and Conquer: Rivals, that look like Apex Legends. In addition, Electronic Arts has the rights to such sports favorites as FIFA19, NHL 19, Madden NFL 19, and NBA Live 19. Plus there’s that old gaming industry warhorse Star Wars in various incarnations, and Battlefield.

Is Electronic Arts a value investment?

Predictably, Mr. Market has sort of taken notice of games popularity. For instance, Electronic Arts stock price was nearly double that of the historic broadcast TV and radio network CBS (NYSE: CBS) on 8 April 2019.

Specifically, CBS shares traded at $51.23 and EA traded at $98.21 a share on that day. However, the money loser Netflix traded at $362.79 a share on that day. So yes, Mr. Market is still as insane as ever.

Yes, Electronic Arts is making money. For example, EA reports a gross profit of $876 million, revenues of $1.289 billion, an operating income of $242 million, and a net income of $262 million for 4th Quarter 2018. So yes, Electronic Arts is making money from games.

Electronic Arts is a Cash Rich Company

I think Electronic Arts is a value investment because it is a cash-rich company.

For example, Electronic Arts reports an operating cash flow of $954 million; an investing cash cash flow of $373 million, and a free cash flow of $933 million for 4th Quarter 2018.

Moreover, Electronic Arts had $3.87 billion in cash and equivalents and $1.274 billion in short-term investments on December 31, 2019. Thus, EA had $5.161 billion in cash on New Year’s Eve 2018. In fact, Electronic Arts’ had more cash than Disney which had $4.455 billion in cash and equivalents on 31 December 2018.

The cash makes EA a good company because it could dominate games. For instance, Electronic Arts has the money to hire the best game creators and to buy up-and-coming game companies.

Thus, Electronic Arts is like the Walt Disney Company (NYSE: DIS) which grows its business by buying other successful entertainment companies. For example, Disney owns Marvel Comics and Star Wars. Thus, EA is in bed with Disney.

Moreover, the business model is proven because Disney reports revenues of $15.303 billion for 4th Quarter 2018. Interestingly, Mr. Market’s assessment of EA is approaching his valuation of Disney. Notably shares in the Magic Kingdom traded at $114.75 on 4 April 2019 or just $15 more than Electronic Arts stock.

Electronic Arts is a Value Investment for the 21st Century

Unfortunately, Electronic Arts does not pay a dividend. Although I predict EA will pay a dividend some day. The financial data indicates EA has the cash to pay a dividend now if management wants.

In addition, I predict Electronic Arts could be a dependable moneymaker for a long time. To explain, games are the entertainment of choice for people under 45 or 50.

Fortnite and Apex Legends’ success demonstrate that interest in certain games is high and growing. More importantly, game companies are building franchises that could be as influential and as long lasting as popular comic books like Batman.

The Audience for Video Games is Growing Fast

Finally, Generation Xers (49-to-54 years old) Millennials (23-to -34-year-old) and Generation Z (under 22) all grew up with video games. These people will keep playing games as they age and make more money, just as Boomers can’t stop watching television.

Thus the audience for games is huge and growing. For instance, Statista estimates there were 65.71 million Generation Xers, 71.86 million Millennials and 86.43 million Generation Z members in the United States in 2017. Hence, Electronic Arts has 224 million potential customers in the United States alone.

Consequently, Electronic Arts has the potential to grow into the richest and most powerful entertainment brand in America. More importantly, you can buy shares in EA.

Electronic Arts will the Dominant Entertainment Brand of the 21st Century

In contrast, Chinese gaming and social media giant Tencent Holdings (OTCPK: TCEHY) owns 40% of Fortnite creator Epic Games, Conviction Capital Research reveals. Thus, buying EA stock lets you invest in games without associating with the Chinese government. The regime in Beijing favors Tencent, which raises serious ethical concerns.

In the final analysis, I consider Electronic Arts (NASDAQ: EA) a value investment for the 21st Century because it could become America’s dominant entertainment brand. Consequently, Electronic Arts and its shareholders could make money for generations to come.

Hence, I advise older value investors to take their eyes off their TV screens and look at what their children and grandchildren are doing. Those who sell Netflix and buy EA could make money from today’s entertainment.