Game of Life

In the ever-evolving landscape of digital entertainment, the video game industry stands as a beacon of creativity and enduring appeal. Once a niche area of entertainment, it has grown into a global phenomenon, engaging a diverse and expansive audience. This sector is characterized by continuous innovation, an array of genres, and a presence across various platforms, from traditional consoles to the ubiquitous mobile devices.

The universal appeal of interactive entertainment transcends age, culture, and geography, creating a market that is not only robust but also teeming with opportunities. As digital content becomes increasingly integral to daily life, video games offer a distinctive combination of narrative, social connection, and immersive experiences, increasingly becoming a fundamental part of modern culture and daily life.

For investors, the video game sector’s ability to navigate technological transformations and its wide-reaching appeal are indicative of its potential for ongoing growth and development. We will present a leading company in this industry, but first, let’s delve into a short update on the economy and markets, and the Smart Investor calendar.


Economy and Markets: Looking Forward

There are several important reports scheduled to be published in the next few days.

  • Later today, the U.S. Census Bureau will release October’s Durable Goods Orders report, which measures the cost of orders received by manufacturers for durable goods, such as vehicles and electrical appliances. As those durable products often involve large investments, they are sensitive to the economic situation. The report helps assess the state of U.S. production activity and draw an outlook for the demand for big-ticket goods, which is dependent on the forecasted state of the consumer and the economy in general.

  • Also today, the University of Michigan will publish its November’s Michigan Consumer Sentiment Index and UoM 5-year Consumer Inflation Expectations reports. These reports portray the results of a monthly survey of consumer confidence levels and consumers’ views of long-term inflation in the United States. The level of confidence affects consumer spending, which contributes about 70% of the U.S. GDP. The inflation expectations index is used as a component of the Fed’s calculations of the Index of Inflation Expectations.

  • On Friday, S&P Global will release the preliminary Global Manufacturing PMI and Services PMI reports. The Manufacturing PMI captures business conditions in the manufacturing sector, which contributes a significant portion of the total GDP; thus, it is an important indicator of business conditions and the overall economic condition in the U.S. Services PMI captures business conditions in the services sector; it is a crucial indicator since the services sector is responsible for almost 80% of total U.S. GDP. PMI indices are leading economic indicators used by economists and analysts to gain timely insights into changing economic conditions since the direction and rate of change in the PMIs usually precede changes in the overall economy.


As for the stock calendar, the Q3 2023 earnings season for Smart Investor Portfolio companies is winding down, with only Ulta Beauty (ULTA) scheduled to report this week.

The ex-dividend date for Everest Group (EG) is November 28th, and for Crane NXT (CXT) it is November 29th.


Today, we are adding the stock of the largest U.S. pure-play gaming company, whose quality metrics and profitability are a standout in its industry.

To make room for this valuable addition, we are letting go of an advanced industrial technology company whose prospects have worsened despite its robust financial health and profitability, while its stock has languished on the back of strong insider selling and analysts’ downgrades.


New Addition: Electronic Arts (EA)

Electronic Arts, Inc. provides digital interactive entertainment. It develops, markets, publishes, and distributes games, content, and online services for game consoles, PCs, mobile phones, and tablets worldwide.

Electronic Arts is one of the top ten video game producers in the world. With the top lines in the video game company ratings taken by diverse tech giants like Sony (SONY), Microsoft (MSFT), and Tencent Holdings (TCEHY), EA ranks as the second-largest pure-play game company after Nintendo (NTDOF).

Over the past decades, video games have become one of the most popular forms of entertainment, leading to a significant increase in the size of the underlying market. The global video game market has reached an estimated size of $250 billion (by revenue), with projected annual growth of ~10%-14% until 2027. By 2027, the number of gamers worldwide is expected to reach 3 billion, increasing the attractiveness of an already lucrative industry and raising the expected in-game advertising revenues, the industry’s largest income segment.

Founded in 1982 in California, Electronic Arts was a pioneer of the home computer game industry. In the decades since its establishment, EA has become a powerhouse in the gaming industry, becoming the absolute leader in the sports games segment of the market. Its iconic franchises like FIFA and Madden NFL are among the most successful video games of all time. In addition to sports games, EA has produced a large number of blockbusters in other niches, including Battlefield, The Sims, Apex Legends, Need for Speed, Dragon Age, and many more.

EA commands a market capitalization of $36 billion and has reported revenues of almost $7.5 billion in fiscal year 2023 (ended March 31, 2023). The company has 13,400 employees in its game studios in North America, Europe, and South Korea. The company’s stock has been publicly traded on the Nasdaq Stock Exchange since 1989.

In June 2023, Electronic Arts underwent a restructuring: it now functions as two organizations under one roof, EA Entertainment and EA Sports. EA Sports handles the company’s lucrative sports properties owned by EA, such as EA Sports FC (previously FIFA), Madden NFL, and other sports games developed by the company, as well as its future sports franchises. EA Entertainment is responsible for the company’s non-sport games, but the name of the division might suggest that the company plans to expand its offerings beyond video games.

While Electronic Arts is a pure-play game maker, its revenue sources are diversified across multiple channels: sales of video games, in-game purchases and microtransactions, in-game advertisement, sales of licensed content, downloadable content releases, organizing of e-sports tournaments, and subscription services. One of the company’s most lucrative assets is the recurring revenue streams from its licensed releases. The company’s console segment is its single-biggest revenue driver, responsible for ~60% of annual revenue. The mobile segment, while currently responsible for only about ~18% of revenue, is the fastest-growing part of EA’s business.

The company has been growing organically, as well as through numerous acquisitions. Over the course of its history, EA has acquired 43 companies. Its most notable buyouts in the past several years include Glu Mobile, purchased for $2.1 billion in 2021, and Playdemic, bought for $1.4 billion, also in 2021.

Microsoft’s successful bid to acquire Activision Blizzard, finalized in September, has given a boost to the whole video game industry, as the market players concluded that regulators will not block acquisitions of game makers by large entertainment or tech companies. According to Raymond James analysts, the primary targets for such buyouts may include Electronic Arts, among its smaller competitors. According to some reports, Disney (DIS) is looking to acquire a video game maker, and a company making the top of its target list is EA. In any case, the Microsoft-AB deal is expected to lead to more M&A in the industry, invigorating the market amid ongoing macroeconomic headwinds.

In contrast to many technology companies in general, and game makers in particular, Electronic Arts showcases stellar financial health. It has a low debt-to-equity ratio of under 25%, well-covered by operating cash flow; it has more cash than its total debt. Its robust liquidity position is reflected in its quick ratio of 1.2 and current ratio of 1.4.

As for capital efficiency, EA features industry-beating metrics. While its Return on Equity (ROE) of 13.5% may seem low, it is higher than the industry average. Meanwhile, its Return on Assets (ROA) of 7.5% and Return on Invested Capital (ROIC) of 9.6% are in the top quarter of the industry’s metrics. The company’s robust profitability is reflected in its gross margin of 76.2%, operating margin of 19.8%, and net profit margin of 20.9%, which are much higher than the averages in the Entertainment industry.

On November 1, EA reported its fiscal Q2 2024 results, featuring strong delivery. EPS and revenues exceeded analyst expectations despite the company’s reorganization, with the performance led by the company’s Sports division. Despite some cyclical weakness in the industry and macroeconomic headwinds, EA registered another quarter of growth in net bookings (net amount of products sold) and generated a healthy amount of free cash, with FCF growing by almost 30% in the year prior to the report. As a result of the successful fiscal first half, analysts upgraded the FY 2024 EPS outlook by 14%.

Despite the company’s financial robustness and a portfolio of valuable products, its stock performance has been weaker than might have been expected, although notably less volatile than that of VanEck Video Gaming and eSports ETF (ESPO). In the past three years, EA stock has gained 11.5%, strongly outpacing ESPO’s loss of 13.5%. In the past 12 months, EA has risen by just 6.2%, while the ETF has notched a gain of 28%, although it was led by its largest holding, Nvidia (NVDA), partly negating the comparison.

In any case, the stock’s modest performance has kept a lid on its valuations, which are usually notoriously high in its industry. While EA’s TTM P/E of 36.9 and Forward P/E of 29.6 might seem too high, they are considerably lower than the company’s historical averages. As Electronic Arts is currently the only U.S. pure-play game maker that has a positive pre-tax income, the valuation comparison across the industry is impossible.

Since EA is financially solid and generates considerable amounts of cash, it shouldn’t come as a surprise that the company compensates its shareholders through dividends and buybacks. Electronic Arts has been paying dividends since 2020, and while its dividend yield is a minute 0.6%, the management intends to keep up the payouts, while the low payout ratio of 11% suggests it has a lot of room to increase the dividends.

In addition to dividends, EA shareholders are rewarded through generous buybacks. The company’s current stock repurchase program, in place since August 2022, authorizes the management to repurchase up to $2.6 billion of stock by November 4, 2024. In fiscal Q2 2024, EA repurchased 2.6 million shares for $325 million, bringing the total for the trailing twelve months to 10.5 million shares for $1.3 billion.

TipRanks-scored top Wall Street analysts see an average upside of 7.5% for EA stock in the next 12 months. However, given the recent financial outperformance, the stock may also surprise on the upside. To note, increased net bookings and a rise in cash at a tough selling period, when gamers become increasingly more cautious in their spending patterns, is a great result that shouldn’t be overlooked.

Electronic Arts carries a TipRanks Smart Score rating of “Perfect 10” with a “Moderate Buy” recommendation:

To conclude, we believe that Electronic Arts has great growth potential, underpinned by its solid finances and robust delivery. While in the next quarter or two EA, as well as its peers, may encounter some macroeconomic headwinds, its financial health should shield it from any serious harm. As the company has the undeniable ability to fund further growth and generously reward its shareholders, we view EA as a valuable long-term addition to the Smart Investor portfolio. A potential acquisition by a large tech or entertainment company could transpire as an additional shareholder reward.


New Deletion: Teledyne Technologies (TDY)

Teledyne Technologies Inc. provides enabling technologies for industrial growth markets that require advanced technology and high reliability. These markets include aerospace and defense, factory automation, air and water quality environmental monitoring, electronics design and development, oceanographic research, deepwater oil and gas exploration and production, and medical and pharmaceutical research. The company operates in four segments: Instrumentation, Digital Imaging, Aerospace & Defense Electronics, and Engineered Systems. Teledyne is a Fortune 500 company belonging to the IT sector (Industry: Electronics).

Teledyne is a financially healthy company with moderate debt, strong liquidity ratios, and good capital efficiency metrics. Its revenues and earnings have displayed consistent growth over the past several years, capitalizing on the stability of business based on long-term government and commercial contracts. In October, the company reported another strong quarter with a significant EPS beat.

Despite all that, in the three months since we purchased TDY for the Smart Portfolio, the market tides have seemingly turned strongly against the company. Summing up the negative momentum, Teledyne’s Smart Score tumbled from a “Perfect 10” when we recommended it back on August 30, to 1/10 (the lowest score) at the moment.

Analysts still rate TDY a “Moderate Buy,” but their price targets for the company have been heading considerably lower in the past two months, which can explain, at least in part, TDY’s stock underperformance in that period.

In one of the most prominent price-target downgrades, Bank of America analysts explained their stance by the weakness in TDY’s largest business segment, Digital Imaging (DI), which is responsible for 56% of total revenues. While Teledyne’s Q3 financial results were robust overall, the DI division registered a slight year-on-year decline. Moreover, BofA expects that DI’s weakness will continue losing steam in 2024 on the back of the weakness of demand in its end-markets, posing a challenge for the company’s upcoming year’s revenue growth. All in all, TDY’s earnings growth is now expected to slow down considerably in the next several quarters.

An even more worrisome development for investors’ sentiment towards the company’s stock is the sharp increase in insider selling in the past few months. Corporate insiders placed informative sales of shares worth $24.2 million in the last three months, including selling by TDY’s directors, CFO, and CEO; there was no insider buying in this period.

While insiders comprise a small percentage of Teledyne’s shareholders, their actions carry an outsized weight on the investors’ perceptions of the company’s prospects. Meanwhile, the company’s largest institutional shareholders, such as T. Rowe Price, State Street, and Invesco, have decreased their exposure to TDY in the past quarter; several investment managers have closed their TDY positions overall. Hedge funds and individual investors also feel increasingly negative towards the stock.

While Teledyne remains a robust and profitable business, it may struggle to overcome these business and market-sentiment headwinds in the short to medium term. Thus, we see it appropriate to sell the stock.


Charter Members of the 30% Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

The markets have been placid in the past week, notching small gains in between important earnings and economic reports. Our exclusive club’s ranks have remained unchanged, with the biggest movements occurring below the 30% threshold.

The Winners Club still includes six stocks: GE, AVGO, ANET, ORCL, CDW, and TECK.

The first in line to enter the ranks of the Winners is still Molina Healthcare (MOH), but with a gain of 21.0% since purchase, it has a lot of ground to cover. Will it be able to close the gap, or will someone else outrun it to the finish line?


What’s Next?

Our next commentary will come out on Wednesday, November 29th, before the market opens.

Until then – we wish you a world of investment success!

Access the full Smart Investor Archive, including all historical stock picks and original newsletters.


Portfolio Changes

New Portfolio Additions

Ticker Date Added Current Price
EA Nov 22, 23 $136.06

New Portfolio Deletions

Ticker Date Added Current Price % Change
TDY Aug 30, 23 $392.87 -5.61%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
GE Jul 27, 22 $119.89 +114.55%
AVGO Mar 22, 23 $981.20 +55.52%
ORCL Dec 21, 22 $116.08 +42.43%
ANET Jun 21, 23 $215.32 +42.12%
CDW Jun 29, 22 $216.84 +37.17%
TECK Dec 8, 21 $36.23 +30.23%
GD Dec 22, 21 $246.41 +20.93%
MOH May 3, 23 $360.17 +20.25%
JBL Jul 5, 23 $130.97 +19.95%
CHKP Jul 19, 23 $144.57 +13.55%
SMCI Nov 8, 23 $289.85 +13.49%
WCC Sep 14, 22 $152.02 +13.31%
ITT Oct 18, 23 $107.77 +12.84%
AMAT May 31, 23 $149.25 +11.97%
STLA Sep 6, 23 $20.18 +11.12%
UNH Apr 19, 23 $539.59 +10.98%
EG Oct 4, 23 $406.99 +9.06%
PH Oct 11, 23 $432.92 +8.83%
ACN Aug 16, 23 $330.26 +7.35%
CI Jul 12, 23 $286.49 +6.62%
TSM Aug 23, 23 $98.41 +4.93%
EME Nov 1, 23 $213.86 +3.63%
STM Sep 13, 23 $45.35 +2.67%
VRTX Aug 2, 23 $354.78 +2.02%
APH Aug 9, 23 $89.67 +1.39%
CXT Oct 25, 23 $52.45 +1.33%
ULTA Nov 15, 23 $404.92 -0.05%
APD Apr 26, 23 $276.34 -3.27%
DE:IFX Apr 5, 23 $33.37 -5.97%
LW Apr 13, 23 $98.14 -9.27%
PERI May 17, 23 $28.23 -9.69%
TEX Sep 20, 23 $49.04 -15.91%
ACLS Sep 27, 23 $127.19 -19.03%



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