Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:
Electronic Arts: Kicking Off a New Era by Tom Sullivan
Summary: What do Sony's (NYSE:SNE) Playstation 3, Microsoft's (NASDAQ:MSFT) Xbox 360 and Nintendo's (OTCPK:NTDOY) Wii all have in common? They're new, in-demand, and are useless without compatible games. That's where Electronic Arts (ERTS) steps in: no matter which console is most popular at any moment, everyone needs games. The company is also making sure to be positioned for the next big thing, spending $200 million a year on developing games for cell phones and other mobile devices. With a goal of reaching 20% of total market sales, EA is looking beyond its core 18 to 30 year old male clientèle, widening its demographic to include mostly everyone. Its stronghold is still the sports arena, with each year's version of Madden NFL reaping more profits than the previous one. With a market value of $15.5 billion and a strong balance sheet, analysts see good things ahead: Consensus is for earnings of $2.15-$2.30 a share towards 2009, triple this year's profits, justifying a high P/E of 38 on 2007e earnings. Shares could jump from $51 to $65 within the year. EA's success is largely due to keeping with the times; earlier this month, it announced stepped-up development of games for the popular Wii, which has attracted parents by getting kids to exercise as they play. It also shows creativity in ideas for profit, like pocketing $5 million last quarter from ads on video game billboards. After peaking in 2004, it looks like the video gaming industry is set for another major boost, with a generation of hand-held devices on the horizon. EA will be waiting.
Related: EA: Microsoft, Sony, We Have a Problem • Electronic Arts: Street Celebrates Strong December Quarter • Electronic Arts: Let the Games Begin! • Electronic Arts F3Q07 (Qtr End 12/31/06) Earnings Call Transcript