I think Electronic Arts is a strong near-term buying opportunity, because the company is well-positioned to capitalize on digital and mobile gaming revenues, realize cost efficiencies by focusing on fewer but more popular titles, and expecting above-average results from FIFA 2015 on the back of the recent World Cup in Brazil.

To expand on this further:

Since 2011, EA has made several acquisitions into the digital and mobile gaming market which is exhibiting double-digit growth and P/E ratios well-above 25x.

In the console game market, where EA is a market leader, EA has shifted its focus from publishing a large number of titles to producing fewer but more popular titles, which is forecasted to result in needle-moving margin improvements.

EA is currently trading just below 20x P/E, which is at the bottom of its 20-25x peer range, and 40% below its pre-financial crisis valuation. The stock faced some headwinds in 2013 due to customer complaints about rushed releases and subsequent resignation of the CEO, but has been on an upwards trajectory.

Given the mass enthusiasm around the 2014 World Cup in Brazil, there’s a strong expectation that FIFA 2015 will provide a significant boost to revenues once its released at the end of this quarter. On the back of this earning boost and multiple expansion, it would appear the stock has significant room to grow in the near to medium term.

EXPLANATION

Every equity analyst on the daily morning call will usually follow the simple structure underlying this response which comprises:

  • Firstly, a thesis statement, which mentions the main points of your thesis and a call to action.
  • Secondly, 2-3 but no more than 3 concise points on why you like the business.
  • Thirdly, a statement that compares the intrinsic value of the business to its market valuation and peers.
  • Lastly, a catalyst that provides a short-term rationale for why the stock is currently a buying or selling opportunity with a price correction being imminent.