Electronic Arts (EA) Is Reportedly In The Game For An M&A Deal, Sending Shares Higher
2:29 pm Monday, May 23rd, 2022
Video game maker Electronic Arts (EA) is powering up today after being positively highlighted in two publications over the weekend. The story that’s primarily pushing the stock higher comes from a news website called Puck, which discussed EA’s ambitions to find a merger partner or to be acquired outright. According to Puck, EA has already approached a few companies, including Disney (DIS), Amazon (AMZN), and Comcast (CMCSA), to gauge their interest in making a deal.
Perhaps EA CEO Andrew Wilson believes that the market isn’t fully valuing the company and its portfolio of games that include FIFA, Madden NFL, Apex Legends, and The Sims. Given its forward P/E of about 18x, compared to about 22x for both Activision Blizzard (ATVI) and Take Two (TTWO), a case can be made that EA is undervalued.
In fact, the notion that EA shares are a bargain was the impetus behind the other bullish mention in the financial news. Barron’s noted that Goldman Sachs (GS) ran a screen to identify stocks that are already priced for a bear market. EA turned up as one of those stocks since its P/E was below its low point from either the 2020 or 2009 bear market — even after cutting 20% off its 2023 EPS estimate.
An attractive valuation isn’t the only attribute that could entice a company to make a move on EA.
During EA’s Q4 earnings conference call on May 10, Wilson spoke about the strength of the gaming market, commenting that games are the top choice of entertainment for Gen Z and Millennials. This statement is supported by EA’s performance in FY22, as net bookings and profit both grew by over 20%.
ESPN is coming off a strong Q2 in which advertising revenue increased by 30%, partly due to healthy viewership of the NBA playoffs and an associated increase in ad pricing. Likewise, ESPN+ experienced a solid 1.0 mln qtr/qtr increase in paid subscribers for a total of 22.3 mln.
EA’s robust growth in mobile could be especially appealing to DIS. This past year, the company generated nearly $1.2 bln in mobile net bookings, led by FIFA Mobile and its 80% surge in unique players in Q4.
Whether a merger or acquisition ultimately pans out for EA is still uncertain, but the stock’s relatively cheap valuation and the intriguing fundamentals of the gaming industry could make it a compelling target. The list of companies that could absorb its $37 bln market cap is pretty short, but we view DIS as an interesting possibility due to the complementary nature of ESPN and EA’s sports game portfolio.
