Electronic Arts: Any Dip Post Q3 Figures A Buying Opportunity

| About: Electronic Arts (EA)

Electronic Arts (NASDAQ:EA) has just released its Q3 figures: EPS topped consensus expectations ($1.26 vs. $1.23), but revenues fell short ($1.57bn vs. $1.66bn). The Q4 guidance points to $800m revenues (vs. consensus $826m) and $0.09 EPS (in line).

The initial reaction is negative, with the stock sinking 7% in after-hours trading. This is in our view a trading / buying opportunity (assuming the reaction is confirmed tomorrow at the opening) for several reasons.

First, the revenue shortfall is not significant (4-5% miss on average over Q3 & Q4) and, more importantly, should not come as a major surprise following the recent GameStop (GME) warning (GameStop is one of the largest video game retailers). In our previous comment on SA, we warned that Q3 would be a tricky quarter…

We know that sales of "old generation" games (PS3 and Xbox 360) are now declining fast and the wait-and-see attitude from consumers in transition phases between old and next generations of hardware is not something new: consumers buy less old gen games in anticipation of the purchase of next gen consoles.

Games for PS4 and Xbox One (7.2m consoles shipped at end-2013) do not yet generate significant revenues for EA and peers and were thus not sufficient to offset the weakness of old gen games. But as the installed base of next gen consoles grows fast (10m units expected very soon), games running on these machines will probably drive EA's revenues by the end of the year.

Second, EA has once again demonstrated strong opex discipline, enabling it to surprise on the upside at the EPS level despite a revenue shortfall. This confirms our view that the group is well prepared to deliver significant margin expansion in this new cycle: profitability, which is already healthy, is likely to take off when revenue growth accelerates. EA has pointed to a potential >20% margin within 3 years, compared to consensus expectations of 13% in FY2013/14 and 17% in FY2016/17. 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 over coming years, with expectations likely to trend upwards in the next quarters. This is not discounted in our view in the current stock valuation (16x 2014/15 EPS). EA is a strong Buy.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in EA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.