If you’re a long-term owner of Electronic Arts (NASDAQ:EA), the volatility exhibited by EA stock since announcing Q3 2019 earnings is enough to drive a teetotaler to drink.
Source: Electronic Arts
Rather than address whether you should be buying EA stock at under $100 (I recommended investors consider it earlier in March) I’d like to address whether the company should be buying back its stock at current prices.
The Argument for Buybacks of EA Stock
First, if you do own EA stock, you better hope Electronic Arts was buying it shares in the aftermath of its third-quarter earnings miss. The company’s shares dropped more than 13% February 6 on the news, EA stock’s worst single-day performance in over a decade.
Although it took the company’s stock only two days of trading to recover, jumping from $80.21 after the Feb. 6 close to $97.24 two days later, a 5% increase from its February 5 closing price of $92.52.
At the end of the third quarter, Electronic Arts had $1.59 billion left of its $2.4 billion share repurchase program initiated in May 2018. In the first nine months of fiscal 2019, Electronics repurchased 10.4 million of its shares for $1.1 billion, an average price per share of $108.53.
So, if the company were willing to buy back more than a billion dollars of its stock at prices well above $100, I would argue that it should spend at least that to buy EA stock at prices below $100.
For example, let’s assume that it invested an additional $1.1 billion at a share price halfway between $80.21 and $92.52. At $87.37 a share, Electronic Arts would have repurchased 12.7 million shares, an additional 24% from the number it acquired in the first nine months of fiscal 2019.
That’s a nice thought, but in the real world, it would never happen for two reasons.
First, it’s unlikely that EA is set up to act this quickly, given its share repurchase history. Secondly, it’s averaging approximately 1.2 million shares a month so far in fiscal 2019, well below the theoretical amount of 12.7 million shares from above.
It’s a nice thought, just the same.
The Argument Against EA Share Repurchases
Most companies do a terrible job repurchasing shares. For every example you can give me of a company that’s managed to buy back its stock near the 52-week low, I’ll give you ten that bought closer to the 52-week high.
How did EA do through the first nine months of fiscal 2019?
Between March 31, 2018, and December 31, 2018, it had a high of $151.26 (July 13) and a low of $73.91 (December 26), for a midpoint of $112.59 a share. The company paid 3.6% less than its midpoint, a decent, if not spectacular job of buying back its stock.
The question that I would have is whether it can continue to buy below its midpoint. Most companies, in my experience, can’t, which would suggest the funds would be better used continuing to develop additional free-to-play games.
Long term, I think $108.53 a share paid by Electronic Arts for its stock will look like an astute investment. Below this point, I see no reason why the company shouldn’t be buying back its stock by the boatload.
Buy away, EA, buy away.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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