EA after the quarter: FIFA, Anthem, Apex Legends and mysterious new Titanfall title mean fiscal 2020 guidance looks conservative

I originally published this as a thread on Twitter (@bakergavin) on February 6. That was the day after EA reported earnings when it was down 15%ish to $80 on a disappointing quarter and guidance — it has since rallied 25%ish to $100 over the last 4 trading days on a strong launch for Apex Legends. Catching up on publishing my Twitter threads here, but everything I wrote on EA the day after the quarter still stands with the proviso that it is now clear that Apex Legends is on an extremely impressive launch curve which I write about next (thread on this already published on Twitter).

EA sets up well for the next 18 months after this reset. Guidance is clearly conservative and FIFA is arguably the second best franchise in videogames after Fortnite. I suspect people will still be playing FIFA in 20 years — unsure about Fortnite unless it really becomes the Oasis/Metaverse in which case it will be worth more than Facebook is today. $80 arguably *only* reflects the value of EA’s sports franchises. i.e. One is getting Battlefield, Need for Speed, Dragon Age, Mass Effect, Anthem, Star Wars Battlefront, Galaxy of Heroes, etc. entirely for free with optionality on all future new non sports franchises.

EA missed numbers for two reasons. First, Battlefied V was a bust. It was doomed by the lack of a Battle Royale mode and creative decisions that were perceived as inauthentic which created a backlash. Second, FIFA19 units were flat on a tough World Cup comp, but FIFA Ultimate Team was still up 6% — impressive.

Going forward, Anthem guidance looks conservative at roughly 50% of Destiny’s launch into a much larger console installed base plus PC (Destiny was console only). The Anthem beta was rocky, but excitement is still high. The Firestorm battle royale mode should at least partially revitalize Battlefied V in March.

Excited to play Apex Legends — this looks like it has the potential to be the AAA free to play competitor that might be able to dethrone PUBG as the #2 battle royale game after Fortnite. Could be super valuable and there is nothing in the 2020 guidance for this. Early reviews seem positive and 2.5m players with basically zero prelaunch marketing is quite good. Curious to see the Twitch numbers in two weeks when EA is no longer paying streamers.

Overall fiscal 2020 guidance (March FY) for low single digit revenue and EPS growth is conservative. FIFA 20 should reaccelerate to MSD-HSD growth including Ultimate Team. The sum of Jedi Fallen Order, the mysterious new Titanfall game, Apex Legends, Need for Speed and PvZ should deliver growth over a disappointing BattleField5 and Anthem. And if Anthem is a success, it might sell more units in fiscal 2020 than fiscal 2019. Basically, it is fairly easy to get to high single digit revenue growth in fiscal 2020.

Creating new franchises like Anthem — and potentially Apex Legends — is valuable. BattleField 6 will be a success (no permanent damage from BattleField 5) in holiday 2021 and I suspect they will finally get Battlefront right on their third try. Cross platform on FIFA will be upside when it happens.

Capital allocation will be solid. Blake is an excellent CFO. No one should worry about value destroying acquisitions — this is a very different $EA vs. 7 years ago. Bethesda would be an excellent acquisition post the Fallout 76 debacle and EA will keep buying stock back.

Finally — nonzero chance that someone tries to buy EA here. Disney and Microsoft are both logical acquirers. Ex this, EA should be a solid low double digit EPS/FCF growth company currently trading at 13x excluding the cash which will either be deployed accretively or used for a buyback.