Video games are one of the most rapidly expanding forms of entertainment. Thanks to improving technology, today’s games are far more immersive than they were even a decade ago, which helps them compete with alternative forms of entertainment, such as television. The demographics of gaming are changing; middle-aged people who grew up with computer games still enjoy them. Throw in new technologies, such as virtual reality (VR) and the advent of eSports, and it’s no wonder a recent report by consultancy PwC estimated that the sector’s total revenue will exceed $300 billion by 2028. One company already benefiting from this is Electronic Arts (Nasdaq: EA).
Electronic Arts is one of the largest video-game studios. It is involved with some of the biggest franchises in the industry. These include the Battlefield and Sims series of games, as well as Sports FC and various other sports franchises, such as the Madden series. While people can still buy individual games, EA also offers a subscription service whereby people can access a library of EA’s top titles for a monthly or yearly fee. Combined with the ability to purchase additional features for each title, such as extra stadia or team uniforms in its sports games, this gives Electronic Arts a recurring income stream.
Electronic Arts is fending off rivals
Costs are rising along with sales as gamers are demanding increasingly lavish spectacles. Any missteps can therefore have a significant impact on the bottom line, as EA found to its cost earlier this year after some of its latest games were less successful than initially expected, causing its share price to fall by 20%. On the plus side, however, rising costs are making things harder for smaller studios, with some closing down and others being taken over. Combined with EA’s strong, recognisable brand, this provides a degree of protection from competition.
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EA’s revenue has grown by more than a third over the last five years, with adjusted profits going up by more than 50% since 2021. Revenue is expected to keep expanding by 5% a year over the next two years, with profits more than doubling during the same period.
Operating margins remain strong at around 20%, with a return on capital employed of around 17%. EA trades at a very reasonable 17 times forecast 2027 earnings, which is far less than other major games studios, such as Take-Two Interactive, which trades at around 26 times 2027 profits (even though it has had to delay the latest release in its Grand Theft Auto franchise).
EA also looks attractive from a technical perspective, with its share price having recovered from the disappointing start to 2025. Moreover, it is trading above both its 50-day and 200-day moving averages. I therefore suggest going long at the current price of $155, at £19 per $1. In that case, I would put the stop loss at $105, giving a total downside of £981.
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