Is there a better choice than electronic art stock?

0
34

we believe that Microsoft stock (NASDAQ
NDAQ
: MSFT) currently appears to be an attractive choice over its industry peer Electronic Arts Stock (NASDAQ: EA), despite the relatively higher valuation of 9.5x lagging earnings versus 4.7x for EA stock. This gap in valuation makes sense given Microsoft’s
MSFT
superior revenue growth in recent years, better profitability and lower financial risk, as discussed below.

While both companies saw revenue growth in recent quarters, growth was better for Microsoft, helped by strong demand for its cloud offerings, including Azure.

Looking at stock returns, Electronic Arts
EA
, with returns of -5% this year, outperformed Microsoft, down 24%, and the broader markets, with the S&P 500 index down 18%. While both companies are likely to see revenue growth in the coming years, Microsoft is expected to do better. There’s more to the equation, and in the sections below we’ll discuss why we think MSFT stocks will outperform EA stocks over the next three years. We compare a range of factors, such as historical revenue growth, returns and valuation multiple, in an interactive dashboard analysis of: Electronic Arts vs Microsoft: Which stock is a better bet? Portions of the analysis are summarized below.

1. Microsoft revenue growth has been stronger

  • Both companies have achieved strong revenue growth in recent quarters. Still, Electronic Arts’ revenue growth at 26% is better than Microsoft’s 18%.
  • In the longer term, however, Microsoft’s revenue has grown at an average growth rate of 16.4% to $168.1 billion in 2021, while Electronic Arts saw its revenue grow by an average of 12.6% to $7.0 billion in fiscal year. 2022, compared to $5.0 billion in fiscal 2019 (Electronic Arts’ fiscal year ends in March).
  • Electronic Arts is making acquisitions of Playdemic, Codemasters, Metalhead Software and Glu Mobile
    GLOO
    acquisitions announced in the recent past. This should bolster revenue growth going forward.
  • Microsoft has recently benefited from strong demand for its cloud offerings, including Azure and productivity and business processes. Revenue growth is also supported by several acquisitions, including Nuance Communications
    NUAN
    Zenimax Media and GitHub, in recent years.
  • U.S Electronic art revenue and Microsoft Revenue dashboards provide more details about the business segments.
  • Looking ahead, Microsoft is likely to continue to see momentum for its cloud business and its previously announced acquisition of gaming company Activision Blizzard
    ATVIA
    will further support revenue growth. Activision Blizzard is home to some very popular game franchises, including Call of Duty and Candy Crush.
  • For Electronic Arts, FIFA is the biggest game, and with the FIFA World Cup coming up later this year, the company is likely to see strong demand for its FIFA games in the coming quarters. The company has a robust pipeline with more sports games to be released in the coming years.
  • Still, looking ahead, Microsoft’s revenue is expected to grow faster than Electronic Arts’s over the next three years. The table below summarizes our revenue expectations for the two companies for the next three years. It points to a CAGR of 4.6% for Electronic Arts, compared to 11.6% CAGR for Microsoft, based on Trefis Machine Learning analysis.
  • Please note that we have different methods for businesses negatively impacted by Covid and businesses not or positively impacted by Covid as we forecast future earnings. For businesses negatively affected by Covid, we factor in the quarterly revenue recovery trajectory to predict recovery to pre-Covid revenue returns. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies that register positive revenue growth during Covid, we consider the annual average growth before Covid with a certain weight of growth during Covid and the last twelve months.

2. Microsoft is more profitable with lower risk

  • Microsoft’s operating margin of 42.1% over the past 12 months is much better than Electronic Arts’ 17.3%.
  • This compares to the figures of 34.1% and 20.1% in 2019, respectively, before the pandemic.
  • Even looking at recent margin growth, Microsoft leads the way, with margin change over the last 12 months versus the last three years of 1.8%, compared to -3.0% for Electronic Arts.
  • Electronic Arts’ operating margins in recent quarters were impacted by higher R&D investments and higher marketing and sales-related costs.
  • Microsoft’s free cash flow margin of 44.9% is also higher than the 27.3% for Electronic Arts.
  • U.S Operating income Electronic Arts and Microsoft operating profit dashboards have more details.
  • Looking at financial risk, Microsoft does better. Debt of 2.6% as a percentage of equity is lower than 5.3% for Electronic Arts, while cash of 53.6% as a percentage of assets is higher than 18.3% for the latter, implying that Microsoft has a better debt position and more cash buffer.

3. The net of everything

  • We see that Microsoft’s revenue growth and profitability have been better. It has a better debt position and more cash buffer. On the other hand, Electronic Arts is available at a relatively lower valuation. Based on historical performance, Microsoft seems to be a better choice.
  • Looking at the outlook now, based on the P&L, because of the high swings in the P/E ratio and the P&L, we still believe that Microsoft is currently the better choice of the two. is. The table below summarizes our revenue and return expectations for EA and MSFT for the next three years and points to an expected return of 33% for Microsoft over this period vs. a 19% expected returns for Electronic Arts stocks, meaning investors can enter both stocks for double-digit gains in the coming years. However, if they have to pick one, they will probably be better off buying MSFT through EA, based on Trefis Machine Learning analysis – Electronic Arts vs Microsoft – which also provides more details on how we arrive at these figures.

While it looks like MSFT stocks will offer better growth over EA stock, it’s helpful to see how Peers of electronic art rate on metrics that matter. Other valuable comparisons for companies in different sectors can be found at Pear Comparisons.

In addition, the Covid-19 crisis has created many price discontinuities that can provide attractive trading opportunities. For example, you will be amazed at how counterintuitive stock valuation is Teradata vs Crane.

With inflation rising and the Fed raising interest rates, among other things, Electronic Arts stock is down 5% this year. Can it go down even more? See how low Electronic Arts stocks can go by comparing the decline in past market crashes. Here’s a performance breakdown of all stocks in past market crashes.

What if you’re looking for a more balanced portfolio instead? U.S high-quality wallet and multi-strategy portfolio have consistently beaten the market since late 2016.

Invest with Trefis Wallets that beat the market

See everything Trefis Price estimates