ELECTRONIC ARTS INC NASDAQ: EA ©2020 Argus Research Company Analyst Report Argus Electronic Arts develops, publishes and distributes interactive software video games. The company's games can be played on a variety of consoles, including the Sony PlayStation, Microsoft's Xbox and the Nintendo Wii. The games, which are also playable on PCs, tablets, mobile video game players and cellular phone handsets, are delivered via internet download from company and third-party online stores, as well as on disks and cartridges. The company typically pays fees to platform manufacturers in exchange for publishing rights and technology. Incorporated in 1982, Electronic Arts is headquartered in Redwood City, California. Analyst's Notes Analysis by Joseph Bonner, CFA, August 10, 2020 ARGUS RATING: BUY • Raising target price to $161 • While the pandemic negatively impacted many businesses in 2Q20, EA had its biggest June sales quarter ever. Stay-at-home restrictions drove strong, broadbased engagement with EA's games and live services. • Non-GAAP revenue rose 78% and non-GAAP EPS rose nearly sixfold from the prior year. EA also raised its full-year revenue and EPS guidance. • We are boosting our FY21 EPS estimate to $5.52 from $5.06 and our FY22 forecast to $5.74 from $5.52. • Our estimates imply average EPS growth of 9% over the next two years, below our five-year earnings growth rate forecast of 12%. INVESTMENT THESIS We are maintaining our BUY rating on Electronic Arts Inc. (NGS: EA) and raising our target price to $161 from $134. EA had a breakout June quarter. This preceded its major sports title releases in the late summer and early fall, which should drive financial momentum at least through year-end. While EA has clearly been a beneficiary of COVID-19 stay-at-home restrictions, we also need to remember that the company remains a videogame industry leader with a deep catalog of popular titles that it is leveraging through new forms of digital distribution. EA increasingly relies on live services and digitally delivered new game content. With the acquisition of Respawn Entertainment in 2017, EA added another highly regarded game developer to its stable. RECENT DEVELOPMENTS On July 30, Electronic Arts posted fiscal 1Q21 results that benefited from strong player engagement during the pandemic. First-quarter EPS beat the consensus forecast by $0.65. Market Data Pricing reflects previous trading week's closing price. 200-Day Moving Average Price ($) 75 100 125 150 Closed at $143.99 on 8/7 52 Week Low: $132.72 52 Week High: $147.36 Target Price: $161.00 Target Price: $161.00 Rating EPS ($) 0.16 Quarterly Annual 0.88 Quarterly Annual 1.93 Quarterly Annual 1.31 Quarterly Annual 4.28 0.25 Quarterly Annual 0.97 Quarterly Annual 2.52 Quarterly Annual 1.08 Quarterly Annual 4.80 1.42 Quarterly Annual 0.21 Quarterly Annual 2.72 Quarterly Annual 1.16 Quarterly Annual ( Estimate) 5.52 0.72 Quarterly Annual 0.70 Quarterly Annual 2.94 Quarterly Annual 1.38 Quarterly Annual ( Estimate) 5.74 0.7 Quarterly Annual 1.2 Quarterly Annual 1.6 Quarterly Annual 1.4 Quarterly Annual 4.9 0.8 Quarterly Annual 1.3 Quarterly Annual 2.0 Quarterly Annual 1.2 Quarterly Annual 5.3 1.4 Quarterly Annual 1.0 Quarterly Annual 2.4 Quarterly Annual 1.3 Quarterly Annual ( Estimate) 6.1 1.3 Quarterly Annual 1.0 Quarterly Annual 2.6 Quarterly Annual 1.4 Quarterly Annual ( Estimate) 6.3 Revenue ($ in Bil.) FY ends Mar 31 Q1 Q2 Q3 Q4 Q1 2019 Q2 Q3 Q4 Q1 2020 Q2 Q3 Q4 Q1 2021 Q2 Q3 Q4 2022 BUY HOLD SELL Argus Recommendations Twelve Month Rating SELL HOLD BUY Five Year Rating SELL HOLD BUY Sector Rating Under Weight Market Weight Over Weight Argus assigns a 12-month BUY, HOLD, or SELL rating to each stock under coverage. • BUY-rated stocks are expected to outperform the market (the benchmark S&P 500 Index) on a risk-adjusted basis over the next year. • HOLD-rated stocks are expected to perform in line with the market. • SELL-rated stocks are expected to underperform the market on a risk-adjusted basis. The distribution of ratings across Argus' entire company universe is: 65% Buy, 34% Hold, 1% Sell. Key Statistics Key Statistics pricing data reflects previous trading day's closing price. Other applicable data are trailing 12-months unless otherwise specified Market Overview Price $140.70 Target Price $161.00 52 Week Price Range $85.69 to $147.36 Shares Outstanding 288.80 Million Dividend $0.00 Sector Overview Sector Communication Services Sector Rating OVER WEIGHT Total % of S&P 500 Market Cap. 10.00% Financial Strength Financial Strength Rating HIGH Debt/Capital Ratio 14.1% Return on Equity 18.8% Net Margin 34.3% Payout Ratio -- Current Ratio 2.45 Revenue $5.79 Billion After-Tax Income $1.98 Billion Valuation Current FY P/E 25.49 Prior FY P/E 29.31 Price/Sales 7.02 Price/Book 5.22 Book Value/Share $26.93 Market Capitalization $40.63 Billion Forecasted Growth 1 Year EPS Growth Forecast 15.00% 5 Year EPS Growth Forecast 12.00% 1 Year Dividend Growth Forecast N/A Risk Beta 0.73 Institutional Ownership 94.24% Page 1 OF 5 Report created Aug 11, 2020 Please see important information about this report on page 5 ELECTRONIC ARTS INC NASDAQ: EA ©2020 Argus Research Company Analyst Report Argus Analyst's Notes ...Continued Revenue beat the consensus by $337 million and management's guidance by $390 million. First-quarter non-GAAP revenue rose 78% from the prior year to $1.39 billion. COVID-19 stay-at-home restrictions drove strong, broadbased engagement with EA's games and live services across the breadth of the company's catalog, including FIFA, Madden, Apex Legends, The Sims, and mobile titles. GAAP revenue rose 21% to $1.46 billion - representing record revenue for the fiscal first quarter. Non-GAAP operating income rose about 7.5-times to $509 million and non-GAAP EPS soared to $1.42 from $0.25 in 1Q20. GAAP diluted EPS fell to $1.25 from $4.75 in 1Q20, which included a one-time $985 million tax benefit. EARNINGS & GROWTH ANALYSIS We are raising our FY21 EPS estimate to $5.52 from $5.06 and our FY22 forecast to $5.74 from $5.52. Our estimates imply average EPS growth of 9% over the next two years, below our five-year earnings growth rate forecast of 12%. Digital net bookings are the key revenue growth stream for EA. Digital revenue has been driven by live services, digital full-game downloads, additional downloadable content, and expansion packs that the company releases over time - all for the purpose of boosting player engagement and extending the life of its games. The company's largest revenue stream, Live Services bookings, rose 61% year-over-year in 1Q to $1.1 billion, compared to a 15% increase in FY20. Full-Game Download bookings also more than doubled in 1Q, to $287 million, after a 2% increase in FY20. Mobile bookings rose 32% in 1Q. Packaged goods revenue rose 5%. Management lauded the 1Q release 'Command & Conquer Remastered' as a top-selling title, along with the company's other 1Q release, 'Burnout Paradise Remastered.' 'Apex Legends' also continued its momentum as the company's premiere live service game in 1Q. The current 2Q will have four new releases. There will also be two new releases in 3Q, all before the holiday season. The company launched 'Rocket Arena' on July 14. 'UFC 4' launches on August 14, followed by the company's anchor sports titles Madden NFL 21 on August 28 and FIFA 21 on October 9. 'StarWars: Squadrons' will launch on October 4 and NHL21 on October 16. The company again has no scheduled new releases in 4Q, but management has hinted at the release of a new, as yet unnamed sports videogame in FY21. However, the company will not release a refresh of its first-person shooter videogame 'Battlefield' in time for the 2020 holidays. With the new Xbox Series X and PlayStation 5 consoles (from Microsoft and Sony, respectively) scheduled for launch in the 2020 holiday season, EA will also be making another tricky transition to next-generation consoles. New consoles generally offer more computing power and better graphics, obvious attractions for players, though EA will need to execute well to provide compatible versions of games released during the transition. Growth & Valuation Analysis GROWTH ANALYSIS ($ in Millions, except per share data) 2016 2017 2018 2019 2020 Revenue 4,396 4,845 5,150 4,950 5,537 COGS 1,354 1,298 1,277 1,322 1,369 Gross Profit 3,042 3,547 3,873 3,628 4,168 SG&A 1,028 1,112 1,110 1,162 1,137 R&D 1,109 1,205 1,320 1,433 1,559 Operating Income 898 1,224 1,434 1,010 1,450 Interest Expense 23 22 -6 -43 -56 Pretax Income 877 1,210 1,449 1,079 1,508 Income Taxes -279 243 406 60 -1,531 Tax Rate (%) — 20 28 6 — Net Income 1,156 967 1,043 1,019 3,039 Diluted Shares Outstanding 330 314 312 306 295 EPS 3.50 3.08 3.34 3.33 10.30 Dividend — — — — — GROWTH RATES (%) Revenue -2.6 10.2 6.3 -3.9 11.9 Operating Income -5.0 36.3 17.2 -29.6 43.6 Net Income 32.1 -16.3 7.9 -2.3 198.2 EPS 30.1 -12.0 8.4 -0.3 209.3 Dividend — — — — — Sustainable Growth Rate 37.2 29.7 20.0 44.0 27.8 VALUATION ANALYSIS Price: High $86.07 $122.79 $151.26 $108.92 — Price: Low $53.01 $77.94 $73.91 $77.20 — Price/Sales: High-Low 6.5 - 4.0 8.0 - 5.1 9.2 - 4.5 6.7 - 4.8 — - — P/E: High-Low 24.6 - 15.1 39.9 - 25.3 45.3 - 22.1 32.7 - 23.2 — - — Price/Cash Flow: High-Low 24.1 - 14.8 23.9 - 15.2 32.2 - 15.7 18.7 - 13.2 — - — Financial & Risk Analysis FINANCIAL STRENGTH 2018 2019 2020 Cash ($ in Millions) 4,258 4,708 3,768 Working Capital ($ in Millions) 3,513 4,116 3,853 Current Ratio 2.41 2.82 2.45 LT Debt/Equity Ratio (%) 21.6 18.6 5.3 Total Debt/Equity Ratio (%) 21.6 18.6 14.3 RATIOS (%) Gross Profit Margin 75.2 73.3 75.3 Operating Margin 27.8 20.4 26.2 Net Margin 20.3 20.6 54.9 Return On Assets 12.8 11.6 30.3 Return On Equity 24.1 20.5 47.5 RISK ANALYSIS Cash Cycle (days) — — — Cash Flow/Cap Ex 15.8 13.0 12.8 Oper. Income/Int. Exp. (ratio) 35.5 26.1 36.9 Payout Ratio The data contained on this page of this report has been provided by Morningstar, Inc. (© 2020 Morningstar, Inc. All Rights Reserved). This data (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. This data is set forth herein for historical reference only and is not necessarily used in Argus’ analysis of the stock set forth on this page of this report or any other stock or other security. All earnings figures are in GAAP. Page 2 OF 5 Report created Aug 11, 2020 Please see important information about this report on page 5 ELECTRONIC ARTS INC NASDAQ: EA ©2020 Argus Research Company Analyst Report Argus Analyst's Notes ...Continued CEO Andrew Wilson has highlighted EA's three key strategic goals: expanding the company's player base, deepening the engagement of players, and enabling access to the company's games through a wider range of delivery platforms. Success in achieving these goals will depend on building the core technology base (as exemplified by the 'Frostbite' game engine), constantly developing new and refreshing older game titles, and expanding into a broader range of delivery platforms, hence the recent Valve/Steam and Google Stadia deals. The company is also looking to grow the player base in part through geographic expansion, both by making games that appeal to international audiences and by providing localized tweaks, such as free-to-play sports games in China and Korea. The company has launched FIFA Mobile in China. It also has a range of strategies for deepening player engagement, including the use of expansion packs after the initial release of a game, live event e-sports, and new mobile delivery platforms. FINANCIAL STRENGTH Our financial strength rating for EA is High, the highest point on our five-point scale. Both S&P and Moody's give EA the highest B rating, investment grade. Outlooks are stable. EA repurchased 747,000 shares for $78 million in 1Q21 after buying back 12.3 million shares for $1.2 billion in FY20 and 11 million shares for $1.2 billion in FY19. It thus seems to be buying back stock at a steady pace. The share count has fallen 2% over the last year. EA does not pay a dividend and we do not expect it to initiate one. MANAGEMENT & RISKS While the COVID-19 lockdown has clearly benefited EA and other videogame developers, player engagement with videogames could decline as economies reopen. Investor sentiment regarding EA's growth projections could change along with any decline in player engagement. While some European sporting events have resumed, the status of future sports seasons is a risk factor for EA given the company's reliance on multiple sports-related titles, with FIFA and Madden typically exhibiting strong sales. The macroeconomic impact from COVID-19 could also crimp discretionary spending on videogames. Andrew Wilson became the company's CEO on September 17, 2013. Mr. Wilson is definitely an insider, having worked for EA since 2000 in a number of different capacities. Before becoming CEO, he headed the company's core sports titles franchise as well as its digital portal, Origin. This background gave Mr. Wilson a unique set of experiences in traditional game development and marketing, as well as in digital gaming. Mr. Wilson has outlined three primary strategic objectives for EA: continuing the transformation to digital platforms, providing 'amazing' game content across platforms, and instilling a culture of execution that will drive profitable growth. Investors in Electronic Arts face considerable losses if the company fails to meet revenue and profit expectations, which Peer & Industry Analysis The graphics in this section are designed to allow investors to compare EA versus its industry peers, the broader sector, and the market as a whole, as defined by the Argus Universe of Coverage. • The scatterplot shows how EA stacks up versus its peers on two key characteristics: long-term growth and value. In general, companies in the lower left-hand corner are more value-oriented, while those in the upper right-hand corner are more growth-oriented. • The table builds on the scatterplot by displaying more financial information. • The bar charts on the right take the analysis two steps further, by broadening the comparison groups into the sector level and the market as a whole. This tool is designed to help investors understand how EA might fit into or modify a diversified portfolio. Value Growth P/E 5-yr Growth Rate(%) 10 11 12 13 25 27.5 30 32.5 ATVI ATVI ATVI ATVI ATVI EA EA EA EA EA 5-yr Net 1-yr EPS Market Cap Growth Current Margin Growth Argus Ticker Company ($ in Millions) Rate (%) FY P/E (%) (%) Rating ATVI Activision Blizzard Inc 63,494 10.0 30.1 26.0 3.3 BUY EA Electronic Arts, Inc. 40,634 12.0 25.5 34.3 4.0 BUY Peer Average 52,064 11.0 27.8 30.1 3.6 P/E EA vs. Market EA vs. Sector More Value More Growth Price/Sales EA vs. Market EA vs. Sector More Value More Growth Price/Book EA vs. Market EA vs. Sector More Value More Growth PEG EA vs. Market EA vs. Sector More Value More Growth 5 Year Growth EA vs. Market EA vs. Sector More Value More Growth Debt/Capital EA vs. Market EA vs. Sector More Value More Growth Page 3 OF 5 Report created Aug 11, 2020 Please see important information about this report on page 5 ELECTRONIC ARTS INC NASDAQ: EA ©2020 Argus Research Company Analyst Report Argus Analyst's Notes ...Continued would likely occur if large numbers of consumers migrate to competitors' titles. Competitive pressures are fierce in this industry. Electronic Arts has published numerous successful game titles in its operating history, but creating a blockbuster game depends on consumer tastes, which are fickle and constantly changing. Moreover, even if the company executes its business plans efficiently, competitive pressures may push rivals to discount titles in order to reduce inventory or improve sales of second-tier games. In addition, because the success of the Xbox is strategically important to Microsoft, the software giant may invest more in game development than third-party publishers currently expect, thereby increasing competitive pressures. This concern also applies to Sony and Nintendo. The forthcoming release of console refreshes in 2020 could also negatively impact EA's revenue if legacy console sales decline at a faster rate than the increase in videogames for new consoles. In addition, with the rise of casual games competing for gamers' dollars, a slew of independent developers has sprung up and major retail sites (including Amazon) have begun direct-to-consumer sales of casual game titles. This trend could further impact sales of complex game software. COMPANY DESCRIPTION Electronic Arts develops, publishes and distributes interactive software video games. The company's games can be played on a variety of consoles, including the Sony PlayStation, Microsoft's Xbox and the Nintendo Wii. The games, which are also playable on PCs, tablets, mobile video game players and cellular phone handsets, are delivered via internet download from company and third-party online stores, as well as on disks and cartridges. The company typically pays fees to platform manufacturers in exchange for publishing rights and technology. Incorporated in 1982, Electronic Arts is headquartered in Redwood City, California. VALUATION EA shares have traded between $85 and $147 over the past 52 weeks, and are currently toward the high end of the range. The shares are up 34% year-to-date, well above the S&P 500's 4% gain. The company's trailing enterprise value/sales multiple of 6.3 is below both the peer group average of 6.7 and the 8.6 of close competitor Activision Blizzard. EA's forward enterprise value/sales multiple of 6.0 is 8% above the peer average, less than the average premium of 20% over the past two years. We are maintaining our BUY rating on EA and raising our target price to $161. On August 10, BUY-rated EA closed at $140.70, down $3.29. Page 4 OF 5 Report created Aug 11, 2020 Please see important information about this report on page 5 METHODOLOGY & DISCLAIMERS NASDAQ: EA ©2020 Argus Research Company Analyst Report Argus About Argus Argus Research, founded by Economist Harold Dorsey in 1934, has built a top-down, fundamental system that is used by Argus analysts. This six-point system includes Industry Analysis, Growth Analysis, Financial Strength Analysis, Management Assessment, Risk Analysis and Valuation Analysis. Utilizing forecasts from Argus’ Economist, the Industry Analysis identifies industries expected to perform well over the next one-to-two years. The Growth Analysis generates proprietary estimates for companies under coverage. In the Financial Strength Analysis, analysts study ratios to understand profitability, liquidity and capital structure. During the Management Assessment, analysts meet with and familiarize themselves with the processes of corporate management teams. Quantitative trends and qualitative threats are assessed under the Risk Analysis. And finally, Argus’ Valuation Analysis model integrates a historical ratio matrix, discounted cash flow modeling, and peer comparison. THE ARGUS RESEARCH RATING SYSTEM Argus uses three ratings for stocks: BUY, HOLD, and SELL. Stocks are rated relative to a benchmark, the S&P 500. • A BUY-rated stock is expected to outperform the S&P 500 on a risk-adjusted basis over a 12-month period. To make this determination, Argus Analysts set target prices, use beta as the measure of risk, and compare expected risk-adjusted stock returns to the S&P 500 forecasts set by the Argus Market Strategist. • A HOLD-rated stock is expected to perform in line with the S&P 500. • A SELL-rated stock is expected to underperform the S&P 500. Argus Research Disclaimer Argus Research Co. (ARC) is an independent investment research provider whose parent company, Argus Investors’ Counsel, Inc. (AIC), is registered with the U.S. Securities and Exchange Commission. Argus Investors’ Counsel is a subsidiary of The Argus Research Group, Inc. Neither The Argus Research Group nor any affiliate is a member of the FINRA or the SIPC. Argus Research is not a registered broker dealer and does not have investment banking operations. 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Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Page 5 OF 5 Report created Aug 11, 2020