Electronic Arts (NASDAQ:) is a worldwide leader in digital interactive entertainment, specifically specializing in developing, marketing, and publishing video games.

Electronic Arts is the producer and owner of rights to several popular franchises including FIFA, Madden NFL and Battlefield.

It has grown to be a $38.1 billion company. Management has also begun to accelerate capital returns for shareholders. The stock is a strong buy. (See EA stock charts on TipRanks)

A Cash Flow Machine

Electronic Arts manages a diversified portfolio of franchises, each engaging with different audiences, which unlocks multiple sources of cash flow for the company.

It allows for a more flexible publishing schedule, which results in consistent revenue. This has helped to eliminate seasonality within the gaming sector.

Electronic Arts enjoys significant economies of scale which result in high profitability. The studio does not have to worry about whether the game is a handful of thousand copies or several million.

Electronic Arts has steadily increased its gross margins over the years as it has grown its user base. Currently, they are at 73.4%. The shift to digital retail means that margins are being supported by lower retail costs.

The company’s high gross margins have made it an unbeatable cash-spinner among its peers.

While the company can scale up its titles and maintain a stable, low-cost CAPEX, it is still able to keep its costs down. Because of this, most cash flows from operations are free cash flow.

The business model is non-capital-intensive, so management can leverage the company’s large free cash flow generation to develop a healthy balance sheet, while also returning a notable portion to stockholders.

Capital Returns, Valuation

Electronic Arts management has gradually started returning an increasing amount of its excess cash flow back to its shareholders. The company has purchased approximately $1.16 trillion of its stock over the last four quarters.

Electronic Arts began a quarterly dividend a little over a year back. The current yield is 0.5%. Although the current yield may not be very meaningful, the dividend could grow significantly in the future.

It is $0.68 per annum, which means a payout ratio just under 10%. This figure was based upon consensus EPS estimates for $6.61.

This stock looks very affordable, with revenues expected to grow as the video game industry expands.

This stock has a forward price-to-earnings ratio of 18 and is currently trading near the low end of its historical range. It is likely to be a tempting entry point for investors.

The company’s latest results showed that it booked $6.1 billion, which suggests that profits and revenues will continue to grow as the industry develops.

Wall Street’s Take

Turning to Wall Street, Electronic Arts has a Strong Buy consensus rating, based on 16 Buys, three Holds, and zero Sells assigned in the past three months. At $173.13, the average EA price target implies 29.4% upside potential.

Disclosure: Nikolaos Sismanis had no position at the time this article was published.

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