Electronic Arts: Growth is Coming

Shares of Electronic Arts (ERTS) have hit a new 52 week low this week, and are sitting just above historical two and five year lows.

While this may prove to be frustrating for current EA stockholders, it will serve as an excellent entry point for new ones.

First Quarter Results: While rivals Activision (ATVID) and Take-Two Interactive (TTWO) have reported stellar earnings, EA has reported a first quarter loss of $95 million (see conference call transcript). This will be the fourth year in a row that EA has reported a net loss in the first quarter. Analysts were expecting revenue of $640 million, but EA earned $609 million.

MMO: More Money Online: The key to future growth for the company will be in the Massively Multiplayer Online [MMO] market. A MMO video game is one that requires players to pay a monthly fee after the initial purchase of the game in order to continue playing. The largest MMO game is World of Warcraft which has an estimated 11 million subscribers.

EA is set to enter the MMO market with not one game, but two. The first game, Warhammer Online is set to be released in the fourth quarter of 2008. While there is no guarantee that the game will be as successful as other MMO games, there has been a good amount of hype generated for the game. Even if EA can retain a few million recurring subscribers to the game, this will help contribute to their earnings.

However, EA may climb to the top of the MMO game market with the acquisition of VG Holdings, the parent company of game developer BioWare and Pandemic Studios. Although no official press released has been made, BioWare is developing a MMO based in the Star Wars universe that is based on the Knights of the Old Republic video game series. A video game that has requires a monthly fee to play on top of a initial $50 investment plus any future expansion packs based on an intellectual property as popular as Star Wars will generate hundreds of millions of dollars in revenue by itself. 

Additional Growth Drivers: The Bioware purchase also gives EA the rights to publish other Bioware titles such as future installments of the Mass Effect series, which has sold close to 2 million copies for the XBOX 360 (MSFT). Bioware has also announced a role playing game called Dragon Age that does not have a release date yet.

On September 7, EA will release Spore a new "creature" based simulation game from Will Wright, the creator of Sim City and The Sims. A demo of the creature creator was sold for $10 at the end of June, and was the best selling PC game for the week ending June 21.

What To Do: With shares at historic lows and great products in store that will drive earnings growth, buy shares of Electronic Arts. Some patience may be required until its full arsenal of games are released, but based on future potential, EA looks cheap.

Disclosure: Author holds a long position in ERTS

Comments

[Ranjit Thomas:]

The stock is at 27x forward proforma EPS, which excludes a significant amount of stock compensation. This hardly looks cheap. Besides, the company is hardly generating any cash, indicating poor earnings quality.

2008 Aug 05 07:59 AM

[vitaminc:]

How could anyone bank on one single quarter for all the revenue and earnings growth is beyond me...

2008 Aug 05 05:46 PM

[2Slick:]

EA has failed in their previous MMO offerings Motor City Online, Sims Online, and Majestic. Only their existing game Ultima Online has been any semblance of success, and they acquired that game when they purchased Origin Systems--meaning it wasn't even an EA original. Historically, EA has shown it has completed failed to understand the exploit the MMO marketplace.

I don't except their entrenched management to treat Warhammer or the Star Wars MMO any differently.

2008 Aug 06 12:14 AM

[Writin_Reg:]

World of Warcraft does so well for Blizzard because Blizzard does not includ a crippling DRM with the software, which EA does now and claims to be putting on all their games, so it will be on the Online games too. EA's DRM is the surprised gift that just keeps on giving, even after their games are uninstalled. It has this particular habit of making some very good gaming machines, be far less a good pc after this DRM, that incidently resides on the Ring 0 = meaning the main command center where Operating Systems live, and continues to exist there making the owners game and work life difficult, as it does not install when an EA game is removed. Nevermind the fact everytime you go online it updates - linking to Sony DADC. Lord knows what it's sending those people, because I don't know, my logs are in encryption form. What I'd like to know is what business EA has putting this DRM on my pc, even though I have removed all of EA's software that has this DRM on it. So what is it sending, receiving and updating - as the games are gone!

You get no help from EA other than the cost of a phone call to the tech help, a long wait on line, and in my case I got hung up on.

What I see for stockholders and people considering Erts stocks added to their portfolio, is a lot of trouble down the line when they do get all those gamers you speculate about with these 2 Online games, and they have some of the problems I encountered with my pc. Never mind the fact you have to reformat your harddrive, or live with it. It's your dollars people, because it's surely not going to be mine. At least not for the long haul anyway.

2008 Aug 06 04:23 AM

[Writin_Reg:]

Correction to my above article - I meant to say the DRM does not uninstall from pcs after an EA game is uninstalled.

Thank you

2008 Aug 06 04:34 AM

[borisb:]

if MMO is one of the sweet spot why not invest in Activision-Blizzard?

2008 Aug 07 01:01 PM

[boulin99:]

why not invest in both EA and ATVI (and thq, ubi, ttwo, ntdoy...) you should have a spread on the entire sector. You can hate EA, but hate's an emotion, and you should invest with your head.

2008 Aug 09 07:32 PM