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Why EA Is Looking Like a Good Value Stock

There are many ways to value a stock. One way is to start by looking at the enterprise value (EV) of the company, or the total value of the business after factoring in the balance sheet. EV is then often compared to its earnings before interest, taxes, depreciation, and amortization (EBITDA). Comparing these two numbers gives you the EV-to-EBITDA ratio, and the lower that figure is, the cheaper the stock is.

Video game company Electronic Arts (NASDAQ: EA) trades at a low EV-to-EBITDA ratio. However, in this clip from Motley Fool Backstage Pass, recorded on Sept. 27, Fool contributor Jose Najarro shares that not only is EA's valuation cheap, but the company is also poised for robust growth in the coming year -- and that's a rare combination.

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Jose Najarro: Right now, I want to take a quick look at their financials. They reported their quarter 1 fiscal year of 2022 results on Aug. 4 of 2021. Wow, we're already in Sept. 27, so almost two months ago. But we can see first thing is their net bookings.

Net bookings, I want to say, for a gaming company is a better metric to look at than revenue. Net bookings is pretty much how much money they make that quarter in forms of money made from game reservations, from digital goods. Maybe we can do another insider of the difference between the two. But for gaming company, I personally like to look at net bookings.

We can see, for the fiscal year of 2021, they made roughly $6.2 billion. For the fiscal year of 2022, which just started, they expect about $7.4 billion. They're seeing huge growth there even though lockdown is easing down in certain states, in certain countries, in certain parts of the world. We can also see full games for 2021, only made up about $1.6 billion out of that $6.2 billion in net bookings. Most net bookings actually come from what they call live services and others. This is pretty much their DLCs, their downloadable content. It's their skins that they sell in products. For example, FIFA is one of the huge moneymaker for them. I believe if you want to get certain players, if you want to get certain boxes, certain uniforms, certain tournaments, you can purchase them as well for certain teams. That's where they're making most of their money.

Another thing is, if we take a look for the quarter, they showed us that for the fiscal year of 2022, they are expected to grow. But then, when they reported their quarter 1 fiscal year 2022 earnings, there was a bit of decrease compared to same time last year. I believe this is something that might have certain investors worried, "Hey, you're saying that the gaming market has nothing to worry but you're seeing a bit of a decrease compared to same time last year." But then they tried to reassure investors by saying, "Hey, even though this quarter was a bit weaker than same time last year, we expect this full year to destroy last year." I guess both sides of investors can definitely see both sides of this. There is definitely the good, there's definitely the bad. If we take a look at trailing 12 months, though, we are seeing still growth compared to the trailing 12 months of same time last year.

I do believe the final things I want to take a look at is, even though this company has done numerous acquisitions, they're still sitting with about $2.8 billion of cash and cash equivalents. If we take a look at their debt, they have about $1.8 billion in non-current debt. This company has a strong balance sheet. Another thing I wanted to look at is, you can see trailing 12 months of revenue is increasing, and they are super positive in operating cash flow for margins, there has been a bit of a dip. But overall, fundamentally, I think EA Games is sitting at strong levels.

The final thing is going to be looking at this company's EV-to-EBITDA forward ratio. Right now, if you take a look it's sitting at somewhere around 13.39, and we can see these are levels that were first seen in the summer of 2020. Over a year has passed, this company has grabbed new acquisitions, numerous new gaming studios, they're releasing new games, they're still seeing growth compared to 2020. For me, I can definitely see the bullish thesis of the gaming market in something like EA.

Jon Quast has no position in any of the stocks mentioned. Jose Najarro 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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