Insights

Will Electronic Arts Disappoint Investors on Tuesday?

Electronic Arts (NASDAQ: EA) investors could be in for a volatile trading week ahead. The video game developer is set to announce its fiscal 2023 first-quarter results (for the quarter ended June 30) in just a few days. And, while its last few reports showed solid sales and profit trends, this update might be different.

Wall Street is worried about an impending growth hangover as consumers tilt demand away from digital content. But that’s just one of the key concerns heading into Tuesday afternoon’s report.

Sales trends

EA gave investors plenty to celebrate in its last earnings update. Back in May, the company revealed that sales rose 18% for the fiscal fourth quarter (ended March 31), marking just a modest deceleration from previous quarters. Overall, sales rose 21% for the full fiscal 2022 year.

Wall Street is bracing for weaker results ahead, with Q1 sales projected to decline by about 1% and with fiscal 2023 projected to see just a 7% revenue increase. EA had a busy release period a year ago but launched relatively few new titles this time around.

Investors should focus more on key growth metrics like audience size and engagement, which are mainly driven by EA’s steady flood of gaming content releases. “We have a strong foundation of deeply engaged players, rich [intellectual property], and a resilient business model,” CFO Chris Suh said in the Q4 earnings release in early May. Look for EA to capitalize on those assets by boosting its platform again this quarter.

Cash and monetization

There are signs that consumers are becoming pickier about spending on digital content and gaming. Roblox has seen its average spending slump in recent months, for example, and Netflix’s user base contracted by 1 million in its first quarter of this year.

EA Cash from Operations (TTM) data by YCharts

Follow EA’s monetization trends for signs of stress here. Keep a close eye on its subscription services, which grew to $1.4 billion last quarter from $1.1 billion a year earlier. These wins also support the company’s gushing cash flow, which is climbing back toward a record high of over $2 billion.

The release pipeline

EA is currently projecting that revenue will land between $7.6 billion and $7.8 billion in 2023 compared to $7 billion this past year. The video game stock‘s price movement over the next week will largely depend on any updates to that outlook.

Demand trends will play a role in those new forecasts, including the reception of the latest FIFA title. But EA’s launch calendar is heavily tilted toward the second half of fiscal 2023, meaning investors will have to wait for more clarity. There are even a few major games that EA hasn’t yet revealed that will be material to the fiscal year ahead.

Assuming EA doesn’t have to postpone any big releases, as Activision Blizzard did, the company will likely post another year of quickly expanding sales, rising cash flow, and improving margins.

While it will be a few more months before the schedule is finalized, this week’s update will remove some of the uncertainty about that launch schedule, and EA’s wider 2023 year.

Demitri Kalogeropoulos has positions in Activision Blizzard and Netflix. The Motley Fool has positions in and recommends Activision Blizzard, Netflix, and Roblox Corporation. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.

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