Electronic Arts (EA) Soars on Star Wars

Last week, Activision (ATVI) reported better-than-expected earnings, but was harshly punished for a loss of World of Warcraft subscribers and weaker-than-expected guidance. Yet on the same day, its rival Electronic Arts (EA) rallied 17% after missing earnings estimates and barely edging past top line expectations. What happened? Daily Chart

For its fourth quarter, Electronic Arts posted an adjusted profit of $0.55 per share, which missed the consensus estimate of $0.57.
Net income also slid 19% to $323 million, or $1.05 per share. Adjusted revenue rose 6.4% to $1.04 billion, beating the analyst estimate of $1.03 billion by a hair. EA's guidance for the current quarter was also terrible, expecting to post an adjusted loss of $0.62 per share on revenue of $450 million. Analysts had expected EA to post a loss of $0.37 on revenue of $534.8 million. Despite all these negative numbers, shares of EA rallied the most in 13 years after its first quarter earnings. Analysts attribute EA's sudden rally to three primary catalysts. First, EA's cost reductions during the quarter, which included aggressive job cuts, increased margins. Meanwhile, digital revenue rose 45% to $618 million and outgrew its packaged goods segment. This suggests that EA's higher margin digital products, which are delivered via downloads, will become its primary form of product delivery. Last but not least, EA announced that it had secured a deal with The Walt Disney Company (DIS) for exclusive rights to produce upcoming Star Wars titles. Through its subsidiary Lucasfilm, Disney intends to release the next installment of Star Wars, Episode VII, in 2015. Episode VII is expected to lead into a new trilogy for the 36-year old franchise, which will generate interest in a whole new generation of video games. EA Labels president Frank Gibeau stated that three of its main studios - DICE, Visceral Games and Bioware - will develop the upcoming Star Wars titles. Bioware, the studio which created EA's best-selling Mass Effect franchise, is no stranger to the Star Wars universe, having already created the 2003 role playing game Knights of the Old Republic and its massive multiplayer online follow-up, The Old Republic. CEO John Riccitello's resignation in March has also cleared the way for fresh leadership. Under Riccitello's six-year reign, products were frequently rushed and botched, raising the ire of investors and gamers alike. Bioware's Mass Effect 3 suffered from a rushed and incomplete ending, The Old Republic never became more than a World of Warcraft clone, and Simcity was unplayable after being purchased due to server connectivity issues. On top of these positive catalysts, EA expects to earn $1.20 per share, well ahead of the Wall Street consensus of $1.08 per share. EA trades at 15.6 times forward earnings with a 5-year PEG ratio of 1.22. The stock does not pay a dividend. Other News About EA Electronic Arts Goes Digital To Beat Industry Headwinds Electronic Arts concentrates on higher margin digital businesses. EA Reboot Cost 900 Jobs EA cuts jobs to reduce costs. Other Stocks in the News The Banking Industry's Tech Nightmares Are Coming True Will P2P payments take down the banking industry? Two Underdogs and a Hidden Gem from China Will these three small cap Chinese stocks rally? Copyright 2013 by InvestorGuide.com, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA InvestorGuide.com, Inc.) or its employees responsible.

Published on May 16, 2013
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

Posted in ...