Should Amazon Buy Electronic Arts?

• News reports suggest Electronic Arts (EA) is actively shopping itself.
• That said, Amazon (AMZN) is considered a potential buyer.
• It’s another reason investors ought to consider AMZN stock.

Amazon (NASDAQ:AMZN) is reportedly one of several massive businesses interested in buying Electronic Arts (NASDAQ:EA), the creator of video game franchises such as FIFA, Battlefield, and Madden NFL. So if you own EA stock, the potential payday is exciting. And if you own AMZN stock, purchasing Electronic Arts seems like a natural target for the e-commerce giant — and here’s why.

Like every potential deal, there are pros and cons to Amazon making a play to buy the video game producer. Thus, I’ll consider what they are, and by the end, you’ll have a better idea of whether Amazon ought to pull out its checkbook for Electronic Arts or not.

So, let’s now dive in and take a closer look at AMZN stock.

It Probably Won’t Pay for EA With AMZN Stock

The genesis of the Electronic Arts buyout started with Comcast (NASDAQ:CMCSA) CEO and controlling shareholder Brian Roberts. He’s been looking to make a major acquisition ever since 2018, when he failed to buy Fox’s entertainment assets, losing out to Disney (NYSE:DIS) and CEO Bob Iger.

Then, the need to do a deal accelerated in January when Microsoft (NASDAQ:MSFT) announced it would pay $68.7 billion for Activision Blizzard (NASDAQ:ATVI). Additionally, Microsoft is paying a 45% premium for ATVI. So, based on Electronic Arts’ current market capitalization of $38 billion, Amazon would likely have to pay at least $55 billion to snag EA.

And with AMZN stock down almost $1,100 over the past year, it would most likely pay cash for the video game producer.

With that in mind, according to Puck, Roberts wanted to buy Electronic Arts and merge it with Comcast’s NBCUniversal division, with Electronic Arts CEO Andrew Wilson running the combined business. Negotiations are said to have fallen apart in the past month.

However, according to Puck’s story, EA is still shopping itself, and Amazon is said to have held talks with the company. Beyond that, the details are murky.

Moreover, EA stock is up more than 5% year-to-date (YTD), which is very good compared to the S&P 500; it’s lost almost 15% in 2022.

Amazon Has a Lot of Cash But Not That Much

At the end of March, Amazon had $66.4 billion in cash and marketable securities and $47.6 billion in long-term debt on its balance sheet for $18.8 billion in net cash. That’s down from $47.3 billion a year earlier.

In other words, a year ago, it would have been better positioned to pay using cash on its balance sheet. It would also have been better positioned to pay for EA with stock. So, now it will have to thread the needle if it wants to woo Electronic Arts successfully.

Also, with Apple (NASDAQ:AAPL) and Disney also reportedly interested in EA, it seems like a longshot for Amazon CEO Andy Jassy to throw his company’s hat in the ring. After all, e-commerce has cooled significantly from 2020 when everyone was home and bored.

However, Jassy did say in October 2021 that video games would become a more critical part of its business than music or video content. In fact, the company reportedly is spending $500 million annually to support the gaming business’s growth trajectory with little to show on its investment.

GamesIndustry.Biz reported last October that Amazon’s New World game was only getting media buzz because Amazon Games launched it. According to DFC Intelligence analyst David Cole, anyone else would have gotten very little fanfare.

It’s Never Paid More Than $14 Billion

Right now, Amazon’s largest acquisition to date is the $13.7 billion it paid for Whole Foods in 2017. Thus, paying 4x that amount for a video game company doesn’t align with its corporate vision of growing organically through innovation and research.

However, as the third-largest company in the S&P 500 by market cap, it would not be surprising if it did make a play for Electronic Arts despite the high cost of doing so.

So, for Amazon, the question remains: to buy or not to buy. That said, I believe it’s too high a price to pay at this point in Amazon’s growth trajectory. It’s still got many levers to pull to grow the top and bottom line.

However, at the very least, it’s another reason to get you off the fence if you’re debating whether to buy AMZN stock on its 2022 dip.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.