Maybe this isn't a good place to do this, but does anyone have a good model for EA (Electronic Arts) that has a build by games. I have a few sell side models but they are all crap. Willing to trade by sending a few sell side models I have on other companies that aren't crap.
Mar 01, 2023
Mar 01, 2023
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Comments ( 8 )
what makes a good model? I'm curious
Bad model = topline and margin drivers are just someone entering in x% growth QoQ for entire business segments / line items, projected out for the next 4-6 quarters. No understanding of why the analyst picked those numbers (they picked them because management told them to, or they want to project to management's public guidance), and no breakdown that gives you a better sense of the business.
Good model = a thoughtful build for topline drivers and unit economics / margins. Build topline by using store counts + new store builds taking into consideration new store productivity or sales/sq ft ., or maybe you are building out by units and ASP. Or sometimes it can be using those management given plugs but having a section that shows what it implies on a unit economics level. Maybe it is TAM and penetration driven (I prefer for that to be less of a driver and more of an output analysis though, gets way too broad). Anything somewhat unit related or related to end market drivers tends to be better than a QoQ growth rate driving things.
For EA, would be great to have some model that has estimates or breakdowns by franchise / units / microtransactions / etc.
Can't help with a model but just wanted to add that models for what I'll call 'episodic content' companies (video games, movie studios, or I guess also other project-style business models like renewables developers or biotech) can get pretty complicated on a unit economics basis if you get really granular. On top of the release schedule, you need to assume a decay curve for each release and your model will be quite sensitive to FY1+FY2 units sold. If there's a material subscription element (as there is for EA games, i.e. battle pass) then you need to overlay a SaaS-style cohort and churn schedule.
Come to think of it, rather than going franchise-by-franchise, a good approximation could be a cohort-style model, where x games are released every year, and then assume total units sold, decay curve / % sold per period (can grab historical), ARPU, and contribution margin. Actually you don't even need number of games released, can just assume total unit sales per year. That shouldn't take too long to build out and can get a good sense for what unit economics / ROICs are implied by consensus / guidance. And then a separate module for the subscription part of the business that feeds from the decay curve in the first part, with x % of purchases converted into subscriptions / microtransactions (attach rate) and standard ARPU / churn assumptions thereafter.
That's probably how I would do it. I don't think the incremental granularity from game/franchise-level modeling gets you anything you wouldn't know after 15 minutes of staring at the simpler build above.
Great advice! Funnily enough I just finished building it pretty similar to what you said. Broke it down by initial unit sales for key franchises (that drive most of business) and then % of users who monetize and average spend for them. Some other catch alls. Was able to do those key franchise unit assumptions off semi-irregular updates and other data.
Needed to get somewhat granular about key franchises because they drive a significant portion of their revenue (FIFA + Madden and their micro-transactions through "ultimate teams", and then APEX, then 1-2 more). Then was able to model out margin contribution for full game vs. "live services" from that build. Tied it all back into their segment disclosure and in a pretty good spot.
To your point I don't think a detailed build for everything would be super helpful but those franchises are so large I felt like I had to, and then the catch all for everything else was more or less what you said. What are the sayings though: directionly correct vs precisely wrong, great enemy of good, 20/80, etc.
I am not a pod shop guy so this gets me nowhere for conviction on quarterly accuracy, but helps me on a longer term basis.
Needs a few more tweaks but your input was super helpful - thanks!
you short EA?
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Learn moreNah...at least not yet, but let me get back to you on that. Went into EA being interested in it as a long following the pullback after earnings. Was also interested in TTWO as a long.
My initial findings suggest EA and TTWO took a hit to ROIC after these mobile acquisitions. TTWO's acquisition of Zynga looks terrible to me - overpaid, and I struggle to believe Zynga has (or will have) good expertise in taking core IP from TTWO and making mobile games from it, so the synergies argument is lacking for me. Looks like some mgmt./bankers took a top down view and saw that the mobile market was growing faster than console and PC, and thought a higher mobile mix for TTWO was a better pitch . Then the idea they can take industry leading IP and sell it on faster growing mobile sounded good. In reality the games Zynga makes are so different, and no one really knows if that IP is as transferable as they think. In theory was good but a tough thing to execute. Now mobile has slowed down from user acquisition costs rising and privacy changes. TTWO going through a heavy investment cycle and trying to switch their story to a larger pipeline of game releases vs. their inconsistent release schedule. Investors are tired of the release push out on TTWO and GTA IV timing. All of those things sound like a recipe for alpha to me - because of my very first question and the difficulty in modeling out units on these companies, the range of estimates on TTWO is a mile wide. Investor fatigue, pushed out games, bad acquisition (maybe/probably), uncertainty on release schedule, difficult to model, margins down on investment cycle - setting up TTWO to release their award winning IP and hopefully you can get a good rate change / perception change if they overcome some of that - gets you to short term revisions upwards that investors over extrapolate and you are set. Catalysts include GTA VI announcement or other games.
The thing is I don't work for a L/S HF (trying to work at one though!), and my small LO firm takes a loooong term outlook and doesn't like stories like TTWO above. So now on to EA... my more tactical hedge fund hat tells me there is some risk in transitioning Fifa to a new name from a branding perspective + Apex decay (which we just got evidence of), + reputation for missing the mark on games + macro downturn impact on F2P. You get incremental news flow that supports those negatives and it can/will hit the stock further, but I am not sure how much more room downwards there is from here to be comfortable with an alpha short - as a pair trade I can get that. I'm checking out EA because if they can hit +6% topline on a longer time horizon with some incremental margin improvement from the existing levers it can be interesting from this level, and any ST dislocations throughout the next two quarters could give a good entry point for that.
Anyways I am rambling now - just my 2 cents, but would appreciate others as well!
Interesting! Should take a look at ATVI. Sure you saw the new M science data that came out...COD and Overwatch are killing it. 1Q22 likely to be very good. I have an EA SS model that's pretty good. can send
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