Electronic Arts Inc

Electronic Arts Inc (NASDAQ: EA) is the world's largest third-party video game publisher. The Company will pay a quarterly dividend of USD 0.17 on 22 September 2021, while the ex-dividend date was 31 August 2021.

Investment Highlights – Sell at USD 141.46

• The Company had reported negative operational cash flow during Q1 FY22, while it was positive for an equivalent period of FY21.
• On the leverage front, the debt-to-equity ratio of 0.24x remained slightly higher than the industry median of 0.23x during Q1 FY22.
• The recent Federal Reserve meeting minutes had indicated a tapering likely to happen this year, which would adversely impact the equity markets worldwide.
• The diluted earnings per share of EA had dropped from USD 10.30 during FY20 to USD 2.87 for FY21. Moreover, the Company had anticipated lower diluted earnings per share of USD 1.58 for FY22.
• The net income had witnessed a downward trend during Q1 FY22 as compared to Q1 FY21.
• From a technical standpoint, the stock is hovering between the upper Bollinger band and middle Bollinger band, indicating a correction in the stock price.

Key Risks

• Changes in regulation on video games, such as those seen in the Chinese market, which imposed curfews on minors, could result in the delay or cancellation of video games by the customers.
• The failure to adopt or apply ethical standards and fulfil legal and regulatory obligations could lead to financial penalties, reputational harm, and loss of customers.

Recent Developments

On 19 August 2021, the Company stated that EA SPORTS™ NHL^® 22 would be released on next-generation consoles on 15 October 2021.

Q1 FY22 Financial Highlights for the three months period ended 30 June 2021 (as of 04 August 2021)

 (Source: Company Result)

• The total net revenue had witnessed a decent growth of around 6.31% to USD 1.55 billion during Q1 FY22 as compared to Q1 FY21.
• EA had demonstrated a cash outflow from operating activities of USD 143 million during Q1 FY22.
• On the profitability front, the net income had shown a significant reduction from USD 365 million during Q1 FY21 to USD 204 million during Q1 FY22.

One Year Share Price Chart

 (Source: Refinitiv; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company had reported decent Q1 FY22 results, with profitability witnessing a substantial decline during the period. Moreover, the Company had managed to provide full-year FY22 guidance. EA expects FY22 revenue to remain around USD 6.85 billion and net income to be approximately USD 456 million. The Company had anticipated a decline in full-year net income during FY22. Thus, it would be advisable for the investors to liquidate the position and book profit at current levels. The stock made a 52-week High and Low of USD 150.35 and USD 110.15, respectively.

Considering the drop in net income during FY21 & Q1 FY22 and the unfavourable valuation conducted above, we have given a "Sell" stance on Electronic Arts Inc at the current market price of USD 141.46 (as on 20 August 2021 at 10:24 AM ET), while we will suggest reinvesting after identifying new growth catalysts for the Company.

Skillz Inc

Skillz Inc (NYSE: SKLZ) provides an online gaming platform that can be integrated into iOS and Android games.

Investment Highlights – Sell at USD 11.08

• According to the consensus estimates, the Company would report a net loss for four more years (FY21 to FY24).
• The expected Federal Reserve tapering by the end of 2021 would have a negative impact on global equities.
• The net income had widened during Q2 FY21 as compared to Q2 FY20.
• From a technical standpoint, the 20-days exponential moving average of USD 12.43 is indicating a correction in the stock price.
• Moreover, the MACD line remained lower than the signal line, indicating a correction in the stock price.

Key Risks

• The heavy reliance on online channels is also imposing risks associated with information technology aspects and cyber-attacks.
• The non-compliance with strict regulations and legislation may result in license cancellations.

Q2 FY21 Financial Highlights for the three months period ended 30 June 2021 (as of 03 August 2021)

 (Source: Company Result)

• On a year-to-year basis, the net revenue grew by around 52% during Q2 FY21.
• The Company had a cash balance of USD 692.80 million as of 30 June 2021.
• On the profitability front, the net loss had widened from negative USD 20.20 million during Q2 FY20 to negative USD 79.60 million for Q2 FY21.

One Year Share Price Chart

 (Source: Refinitiv; Analysis done by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

The stock price got plunged by approximately 50% on a year-to-date basis. The Company had made several strategic acquisitions to gain substantial market share. Moreover, SKLZ had acquired Aarki with more than 465 million monthly users. On a standalone basis, SKLZ expects FY21 revenue to be ranging from USD 375 million to USD 376 million. The stock made a 52-week High and Low of USD 46.30 and USD 10.06, respectively.

Considering the weak profitability and unfavourable valuation conducted above, we have given a "Sell" stance on Skillz Inc at the current market price of USD 11.08 (as on 20 August 2021 at 10:35 AM ET).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

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