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The recent pressure on Electronic Arts (NASDAQ:EA) and peers, Activision (NASDAQ:ATVI) and Ubisoft (OTCPK:UBSFY), is a buying opportunity for those who missed the rally last year.

The initial success of PS4 and Xbox One points to a healthy new cycle for video-games makers

As we expected, both the PS4 and Xbox One have had a strong start with initial sales setting records (2.1 million units for the PS4 in 2 weeks) and with both consoles selling out in many locations in early December. The attractive pricing of the new consoles (compared to the previous generation) is obviously a key driver of demand.

This early success of Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) is at the same time a blow to Nintendo (OTCPK:NTDOY)'s efforts with its Wii U. And it looks like investors are getting increasingly skeptical that Nintendo will reach its 9 million units for the Wii U this fiscal year, having sold only 460,000 machines in H1 at a time when the PS4 and Xbox One were not there.

Despite this positive environment with the installed base of next gen consoles growing fast, software makers have declined from their recent highs (roughly -20% for EA) - does it suggest the end of the story for EA and peers?

Margin expansion to be a key driver of EA's stock price appreciation

While Ubisoft's stock price decline was prompted by the delay of two major games, the recent pressure on EA is due to technical problems on its Battlefield franchise. In all, this confirms that the transition phase between two generations of hardware is always tricky for game-makers.

This transition and one-off issues are likely to last at least one or two quarters. Anyway, we are convinced that the sector investment thesis is likely to benefit from rising FY14/15 and FY15/16 expectations as the fast growing installed base of PS4 and Xbox One gives confidence in game-makers' top-line acceleration. Against this positive backdrop, EA is also likely to benefit over coming years from the recent 10-year Star Wars deal with Disney (NYSE:DIS): according to various press reports, EA has already started working on a new Star Wars game. And the Star Wars franchise will probably start having a major impact on EA's earnings in FY2015/16 when Episode VII releases.

At the same time, the current strong cost control despite the R&D investments needed for next gen (see EA's Q2 press release: "financial discipline… managing our costs…") suggests that profitability will take off when revenue growth accelerates. Operating margin expansion is likely to be a major driver in our view, with a >20% margin in sight within 3 years (vs c.13% expected in FY2013/14). Nothing extraordinary here, EA would basically return to its previous margin highs.

In all, we continue to believe that EA is set to deliver strong double digit EPS growth on average over the coming years, with expectations likely to trend upwards in the next months. This is not discounted in our view in the current stock valuation (18x 2013/14 EPS). EA is a strong Buy.

Source: EA's Recent Stock Price Correction A Buying Opportunity