EA's management still highly regarded by investors

Will the video game publisher's market value manage to break through the ceiling it has been limited by for seven years?

While the answer to this question remains uncertain, Electronic Arts at least has the merit of consistently landing on its feet— the title was well chosen—thanks to a business model based on the annual re-release of successful sports franchises, as well as the iconic Star Wars and Battlefield series.

This re-release model, around which its organization is built, allows it to control distribution via its Origin platform, maintain regular sales, and keep development costs under control. EA thus avoids the pitfall highlighted so many times by MarketScreener with other video game publishers, such as GTA 6, which is a double-or-nothing gamble for Take-Two, Paradox Interactive AB: Half a surprise, and Ubisoft: hopes dashed.

EA has other assets to offer investors: a very strong financial position with no net debt; a fair and well-calibrated stock option compensation policy; and transparent accounting, as the group does not capitalize its development costs, which greatly simplifies readability.

But this does not solve the growth problem, with cash profit—or free cash flow—growing at an annualized rate of only 3.4% over the last decade. Admittedly, as EA redirects almost all of its profits to share buybacks, per share, this rate of profit growth is faster, reaching 5.9%.

Over the past ten years, the number of shares outstanding has been reduced by a fifth, from 330 million to 264 million on a diluted basis. The group generated aggregate free cash flow of $13 billion over the period, of which $12.5 billion was used for share buybacks.

EA's current valuation represents a multiple of 22 times free cash flow. This is its historical average, or at least the average observed since the group adopted this policy of massive share buybacks in 2013. Since then, the valuation has never fallen below a multiple of 16 times free cash flow, which shows how much the market likes it.

Implemented by Andrew Wilson when he took over as head of EA, the policy was immediately welcomed by investors, as it was part of a general rationalization policy aimed at streamlining the catalog of titles to retain only the most profitable franchises.

The question that more skeptical analysts will naturally ask is how long this strategy will remain viable.