Insights

Why Electronic Arts Stock Rocketed After Earnings

What happened
In a curious turn of events, video game giant Electronic Arts (NASDAQ: EA) reported an apparent earnings miss last night — and then its stock rocketed higher.
Expected to report pro forma profits of $1.43 per share with net bookings (note: this is different from sales) of $1.77 billion for its fourth fiscal quarter of 2022, EA instead reported a mere $0.80 per share profit under generally accepted accounting principles (GAAP) with net bookings of $1.75 billion.  
Regardless, as of 11:25 a.m. ET this morning, EA stock is up 12.2%.
Image source: Getty Images.

So what
How does that make sense? Let’s take a look.  
“Net bookings” for the quarter may have missed estimates, but they still grew 17.5% year over year. Electronic Arts’ actual revenue was also quite strong, growing 35.6% year over year, to $1.82 billion. And if EA’s GAAP profits were less than the pro forma profits predicted, they still more than tripled to $0.80 per share — which doesn’t sound so bad to me. (It’s not even certain that EA missed, by the way. According to some media reports, when adjusted for one-time items, the company’s profit was actually a bit ahead of expectations.)  
For the full year, sales grew 24.2% to just under $7 billion, and net bookings were up 21.4% at $7.5 billion, which shows EA is still growing strongly, and implies that as bookings turn into revenue, the latter will keep on growing.
Now what
Indeed, turning to the forecast, Electronic Arts told investors that its total revenue in fiscal 2023 should range from $7.6 billion to $7.8 billion, with net bookings ranging from $7.9 billion to $8.1 billion — all numbers consistent with analyst expectations, and not at all suggestive of a deteriorating business.
On the downside, EA did warn that its earnings this coming year may come up short again — no more than $2.87 per share, GAAP, versus Wall Street predictions of $7.43 per share, pro forma. Again, this isn’t an apples-to-apples comparison, though, which may explain why investors aren’t too concerned by the prediction.  
That being said, from a traditional valuation perspective, I have to point out: If all EA is earning is $2.87 per share GAAP, on a $125 stock price that works out to a P/E ratio of about 43.5. Long story short, EA’s quarter may not have been quite as bad as it at first appeared, but the stock still isn’t cheap. Buyer beware.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy. –

What happened

In a curious turn of events, video game giant Electronic Arts (NASDAQ: EA) reported an apparent earnings miss last night — and then its stock rocketed higher.

Expected to report pro forma profits of $1.43 per share with net bookings (note: this is different from sales) of $1.77 billion for its fourth fiscal quarter of 2022, EA instead reported a mere $0.80 per share profit under generally accepted accounting principles (GAAP) with net bookings of $1.75 billion.  

Regardless, as of 11:25 a.m. ET this morning, EA stock is up 12.2%.

Image source: Getty Images.

So what

How does that make sense? Let’s take a look.  

“Net bookings” for the quarter may have missed estimates, but they still grew 17.5% year over year. Electronic Arts’ actual revenue was also quite strong, growing 35.6% year over year, to $1.82 billion. And if EA’s GAAP profits were less than the pro forma profits predicted, they still more than tripled to $0.80 per share — which doesn’t sound so bad to me. (It’s not even certain that EA missed, by the way. According to some media reports, when adjusted for one-time items, the company’s profit was actually a bit ahead of expectations.)  

For the full year, sales grew 24.2% to just under $7 billion, and net bookings were up 21.4% at $7.5 billion, which shows EA is still growing strongly, and implies that as bookings turn into revenue, the latter will keep on growing.

Now what

Indeed, turning to the forecast, Electronic Arts told investors that its total revenue in fiscal 2023 should range from $7.6 billion to $7.8 billion, with net bookings ranging from $7.9 billion to $8.1 billion — all numbers consistent with analyst expectations, and not at all suggestive of a deteriorating business.

On the downside, EA did warn that its earnings this coming year may come up short again — no more than $2.87 per share, GAAP, versus Wall Street predictions of $7.43 per share, pro forma. Again, this isn’t an apples-to-apples comparison, though, which may explain why investors aren’t too concerned by the prediction.  

That being said, from a traditional valuation perspective, I have to point out: If all EA is earning is $2.87 per share GAAP, on a $125 stock price that works out to a P/E ratio of about 43.5. Long story short, EA’s quarter may not have been quite as bad as it at first appeared, but the stock still isn’t cheap. Buyer beware.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.

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