Electronic Art's stock was up 4% today because of an unconfirmed report that Amazon will be acquiring the company. I'm not clear if Amazon will move forward with the bid, but I'm not surprised that Electronic Arts will be acquired sooner rather than later. We already know that Apple, Disney, Amazon, and NBCUniversal have been discussing acquiring the company since May '22. There are also other big tech players like Meta, Google, Nvidia, Netflix, and Nike who are potential suitors given their aspirations for the metaverse, they already missed out on Activision Blizzard after agreeing to be acquired by Microsoft, and there is a low supply of targets with the customer base & intellectual property that EA has to help them reach their metaverse goals.
Extra backgroun about EA's being potentially acquired: Report: EA Looking To Sell Or Merge (kotaku.com.au)
Link is a sensitivity analysis of possible valuations for EA: https://imgur.com/a/3Boxkl0
Two key takeaways:
- According to my analysis, a fair value (yellow) would be at least +$173/share or +30% upside from today's price. That would be consistent with EA's FY '23 EBITDA guidance for +$2,400m and a 20.0x multiple for a software company that is growing the top-line by high single-digits and +30% EBITDA margins.
- ATVI was acquired by Microsoft for a 17.5x multiple. Applying that same multiple to EA's EBITDA guidance (blue) would imply $150/share or +13% upside from today's price. In my view, that 17.5x multiple for EA is the floor because ATVI merited a lower multiple given internal scandals and declining performance for Call of Duty.
I'm not going to time the acquisition or bet that Amazon will win, but sooner or later I expect EA to be acquired by a big tech player that wants to win the race for the metaverse and shareholders should expect at least +$173/share and a +30% return to be acquired.
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