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Electronic Arts (NASDAQ:EA) is the 3rd largest video games company in the world behind Nintendo (OTCPK:NTDOY) and Activision Blizzard (NASDAQ:ATVI). I've been noticing it in the news lately due to today's earnings release, and decided to take a look based on two factors: 1) an old college buddy works there, and 2) it makes The Sims Free Play and Bejeweled, my favorite iPad apps.

Some background: Electronic Arts is a longtime leader in the games industry, with a terrific catalog of premium franchises, including Madden NFL Football, The Sims, FIFA, NHL, and Battlefield 3. Lately industry game sales growth has slowed as competition has come from online games, including those played on social media sites like Facebook. An ongoing lack of sales of new game consoles has also contributed to the decline in game sales.

The company has suffered a 30% loss in its stock price since last year, with a close today near the 52-week low at $15.13. An additional indignity was heaped on the company last month, when The Consumerist named it the Worst Company in America, as voted by readers. Per the announcement: "For years, while movies and music became more affordable and publishers piled on bonus content - or multiple modes of delivery - as added value to entice customers to buy, video games have continued to be priced like premium goods. There have even been numerous accusations that EA and its ilk deliberately hold back game content with the sole intent of charging a fee for it at a later date. It's one thing to support a game with new content that is worth the price. It's another to put out an inferior - and occasionally broken - product with the mindset of "ah, we'll fix it later and make some money for doing so."

4th Quarter 2012 and full-year results released yesterday yielded mixed messages. 4th Quarter was essentially in line with analyst estimates, with earnings beating by a penny and revenues beating by 2%. However, guidance for 2013 has been lowered significantly from what analysts had estimated, with EPS for FY2013 now at $1.12 vs $1.35.

Electronic Arts had been betting heavily on the December 2011 release of its online multiplayer game Star Wars: The Old Republic, spending more money on the game than on any other in its history. The company was hoping the new game would attract the same kind of loyal audience as Activision's immensely popular World of Warcraft, which is seven years old and boasts 10 million subscribers. Electronic Arts needs a hit of that kind, that can provide a steady stream of monthly payments from subscribers and help smooth out the fluctuations of the video game sales market between new releases.

However, the earnings conference call revealed that of the initial 1.7 million subscribers for SW:TOR, four hundred thousand had already abandoned the game. The company plans to release 2 expansion packs with more content during this upcoming quarter, but the momentum has been lost. Positive spin by the company claimed that the losses came from "casual and trial players cycling out of the subscriber base, driving up the overall percentage of paying subscribers," according to Ken Barker, EA's senior vice president and chief accounting officer.

The news, however, was not all bad. Mass Effects 3, released in March 2012, was the best-selling game in March, according to IGN, and sold more than twice as many copies as the release of Mass Effects 2 sold in its introductory month, January 2010.

Per CEO John Riccitiello, the company is moving away from packaged video games to digital games, such as downloads and online games on various platforms including mobile (tablets and smart phones). The digital distribution channel is now predicted to account for approximately 40% of total sales, and grew at a rate of 47% year-over-year. The mobile games revenue is growing as well, at 25% year-over-year, although still accounting for less than 10% of total revenue. Riccitiello was the keynote speaker at this week's CTIA 2012 conference in New Orleans.

During the call, the company stated that part of the lowered guidance for 2013 resulted from the delaying of one planned title release from 2013 to 2014. It did not elaborate on which title would be delayed.

After-hours, the stock was trading down as much as 9%, to a 52-week low of $13.75. Based on that price, the forward PE on Electronic Arts is 12.3, compared to the current Activision PE of 13.4, and an industry PE of 10.6. Activision is scheduled to release its earnings on May 9.

Before the earnings release, the Trefis Team had called for a Buy recommendation with a $20 target. Citibank analyst Neil Doshi was also recommending the company on May 4, saying the stock could climb better than 70% based on his estimate of earnings.

Electronic Arts boasts a strong balance sheet, low debt, lots of cash, a great catalog of popular franchises, and growing digital and mobile distribution. However, I am concerned about the Star Wars subscription losses and the lowered guidance for FY 2013. I recommend holding off at this time, and will take another look at the company after the next quarter's earnings are released in August.

Source: Electronic Arts: Hold For Now