Electronic Arts (EA)

Video game publisher Electronic Arts (NASDAQ:EA) announced better-than-expected revenue in Q3 CY2025, but sales fell by 9.2% year on year to $1.84 billion. Its GAAP profit of $0.54 per share was 52.7% above analysts’ consensus estimates.

Company Overview

Best known for its Madden NFL and FIFA sports franchises, Electronic Arts (NASDAQ:EA) is one of the world’s largest video game publishers.

Since videogames were invented in the 1970s, they have gradually taken more share of entertainment time. Ubiquitous mobile devices have powered a surge in “snackable” games that can be played on the go. Over time, games have developed more social engagement features where friends can play games together over the internet. The business models of games publishers have become less volatile due to digitization of distribution, in game monetization, and like Hollywood, an increasing dependence on surefire hit franchises. Covid driven lockdowns accelerated adoption and usage of videogames – a trend that has not slowed.

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Electronic Arts struggled to consistently increase demand as its $7.29 billion of sales for the trailing 12 months was close to its revenue three years ago. This wasn’t a great result, but there are still things to like about Electronic Arts.

This quarter, Electronic Arts’s revenue fell by 9.2% year on year to $1.84 billion but beat Wall Street’s estimates by 1%.

Looking ahead, sell-side analysts expect revenue to grow 9.5% over the next 12 months. While this projection implies its newer products and services will fuel better top-line performance, it is still below average for the sector.

For gaming businesses like Electronic Arts, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include royalties to sports leagues or celebrities featured in games, fees paid to Alphabet or Apple for games downloaded in their digital app stores, and data center hosting expenses associated with delivering games over the internet.

Electronic Arts has robust unit economics, an output of its asset-lite business model and pricing power. Its margin is better than the broader consumer internet industry and enables the company to fund large investments in new products and marketing during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 78.7% gross margin over the last two years. That means Electronic Arts only paid its providers $21.32 for every $100 in revenue.

This quarter, Electronic Arts’s gross profit margin was 75.9%, marking a 1.6 percentage point decrease from 77.5% in the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Unlike enterprise software that’s typically sold by dedicated sales teams, consumer internet businesses like Electronic Arts grow from a combination of product virality, paid advertisement, and incentives.

Electronic Arts is extremely efficient at acquiring new users, spending only 17.5% of its gross profit on sales and marketing expenses over the last year. This efficiency indicates that it has a highly differentiated product offering and strong brand reputation, giving Electronic Arts the freedom to invest its resources into new growth initiatives while maintaining optionality.

Electronic Arts has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer internet business, boasting an average EBITDA margin of 32.8%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Electronic Arts’s EBITDA margin decreased by 9.3 percentage points over the last few years. Even though its historical margin was healthy, shareholders will want to see Electronic Arts become more profitable in the future.

In Q3, Electronic Arts generated an EBITDA margin profit margin of 24.8%, down 15.4 percentage points year on year. Since Electronic Arts’s EBITDA margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Diving into the nuances of Electronic Arts’s earnings can give us a better understanding of its performance. A three-year view shows that Electronic Arts has repurchased its stock, shrinking its share count by 9.7%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

In Q3, Electronic Arts reported EPS of $0.54, down from $1.11 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Electronic Arts’s full-year EPS of $3.42 to grow 52.2%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Electronic Arts has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the consumer internet sector, averaging 24.7% over the last two years.

Taking a step back, we can see that Electronic Arts’s margin expanded by 1.1 percentage points over the last few years. This shows the company is heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Electronic Arts’s free cash flow clocked in at $87 million in Q3, equivalent to a 4.7% margin. The company’s cash profitability regressed as it was 4.4 percentage points lower than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

Electronic Arts reported $1.26 billion of cash and $1.89 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.16 billion of EBITDA over the last 12 months, we view Electronic Arts’s 0.3× net-debt-to-EBITDA ratio as safe. We also see its $109 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results. Overall, this was a weaker quarter. The stock remained flat at $200.40 immediately following the results.

Updated: December 4, 2025 at 9:18 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Electronic Arts.

There are things to like about Electronic Arts. Although its revenue was flat over the last three years, its growth over the next 12 months is expected to be higher. And while Electronic Arts’s declining EPS over the last three years makes it a less attractive asset to the public markets, its impressive EBITDA margins show it has a highly efficient business model. On top of that, its projected EPS for the next year implies the company’s fundamentals will improve.

Electronic Arts’s EV/EBITDA ratio based on the next 12 months is 15.4x. At this valuation, there’s a lot of good news priced in. This is a good one to add to your watchlist - there are better opportunities elsewhere at the moment.

Wall Street analysts have a consensus one-year price target of $202.36 on the company (compared to the current share price of $203.41).