Electronic Arts: It's In The Gains!

| About: Electronic Arts (EA)

Summary

EA at least had a game in the top three games during the month of November, Battlefield 1.

During the month of December EA continued to have two games in the top five, Battlefield 1 and Madden NFL 17.

Despite investors beating up the stock after earnings, Wedbush seems to believe that EA should beat the low guidance numbers throughout the year.

Electronic Arts (NASDAQ:EA) is a stock I've held for almost three quarters now in my Portfolio of 12 with gains slightly beating the S&P 500 during the holding period, 15.1% to 13.1%, respectively. I initially purchased the stock for the growth portion of the portfolio but with the recent price action in the name I feel that the holding has run its course. With my first quarter portfolio changeout coming soon I feel it is an important time to review what has been happening at the company recently to see if it is still worthy of a position in the portfolio.

Since November total videogame sales have been dropping simultaneously with console sales. During the month of November sales dropped 24% to $2B as videogame hardware sales saw a drop of 35% to $723.8M. Videogame software sales also dropped to the tune of 18% to $955.2M. EA at least had a game in the top three games during the month of November, Battlefield 1. Battlefield 1 has been a very well acclaimed game and was launched back in October. But that wasn't the only game that EA had in the top ten, it also had Titanfall 2 which landed in the fifth spot, Madden NFL 17 in the seventh spot, and FIFA 17 in the tenth spot. EA isn't doing too bad by having 40% of the top ten games in terms of sales.

December was more of the same however with total videogame sales dropping 15% from the prior year. Videogame software sales dropped 12% to $1.2B for the industry but then again 2015 was a tough year to be compared against. During the month of December EA continued to have two games in the top five, Battlefield 1 and Madden NFL 17 but stumbled a bit overall from November with only FIFA 17 coming in ninth and EA only occupying 30% of the top ten games.

With the background set for two-thirds of the calendar fourth quarter EA was set to report earnings after the bell on 31Jan17. The company reported a bottom line number of nothing while analysts were expecting EA to lose $0.16 on the quarter while reporting $1.2B in revenue (a 7.5% increase from last year) on estimates of $1.13B. Overall the report looked like it was a stellar one as shares initially increased 0.7% at the start of after-hours trading.

However, as the conference call started and management started to speak to the quarter and the future, investors started to bid the price of the stock downward to the tune of 1.7%. The drop in the stock price came amid the company eclipsing the $1B operating cash flow mark for the first time in its history on a quarterly basis. The historic even came at the hands of the company's digital live services. Management highlighted that FIFA 17 was the best selling game of the year and that overall digital net sales increased 18% for the trailing twelve months. Digital net sales accounted for nearly 60% of net sales for the year and coincidentally the quarter. Product revenues were up 3.8% while service revenues were up 12.4%.

That all sounds great, right? The problem however came when the company started to announce guidance for the coming calendar year. Management expects revenues to come in around $4.8B when the street was looking for $4.9B on EPS of $2.91 versus an estimate of $2.79. Fiscal fourth quarter (the current quarter) revenues are expected to come in at $1.5B on estimates of $1.1B and EPS of $1.64 versus an estimate of $1.60. So the problem doesn't seem to be coming from the front quarter of the calendar year, but perhaps the last quarter which should technically be the strongest part of the year for these guys.

Despite investors beating up the stock Wedbush seems to believe that EA should beat the low guidance numbers throughout the year. I can't blame the management for tempering expectations of Wall Street by under-promising and over-delivering. You never want to promise something you can't achieve, people just end up getting disappointed with you. Wedbush currently has an "outperform" rating and a price target of $95 which should be good for a 10.5% gain on today's price of $86. The stock seemed to drop in price for the next few days after reporting earnings but skyrocketed 3.5% on Friday in conjunction with Activision Blizzard's (NASDAQ:ATVI) earnings report late Thursday.

I actually initiated my position in EA in late May and have been pretty happy with the purchase thus far. I will not purchase shares until they get below $72, because I believe that is where it offers additional value. I've selected $72 because it is the midway point of the 52-week range.

I swapped out of Boeing (NYSE: BA) for EA during the 2016 second quarter portfolio change-out because I ended up turning a profit in the name (4.4%, or 14.1% annualized) and wanted to lock in those profits. Since the swap, I have lost out on some gains, as it has underperformed Boeing since the swap. For now, here is a chart to compare how EA and Boeing have done against each other and the S&P 500 since I swapped the names.

When it is all said and done, it matters what the stock has done in an investor's portfolio at the end of the day. For me, EA is one of my smaller positions and has been doing well, as I'm up 15.1% on the name, while the position occupies roughly 3.9% of my portfolio. I continue to believe in the name because it has been offering great earnings near- and long-term growth expectations.

I own the stock for the growth portion of my portfolio, and I will continue to hold onto the stock for now. I am up 13.9% since the inception of my portfolio, while the S&P 500 is up 11.4%. Below is a quick glance at my portfolio and how each position is performing. Thanks for reading, and I look forward to your comments.

Company

Ticker

% Change incl. DIV

% of Portfolio

Skyworks Solutions Inc.

(NASDAQ:SWKS)

15.58%

10.63%

Electronic Arts Inc.

15.06%

3.92%

Facebook, Inc.

(NASDAQ:FB)

10.40%

9.65%

The Home Depot, Inc.

(NYSE:HD)

7.41%

4.92%

Eaton Vance Corp

(NYSE:EV)

5.84%

4.84%

Diageo plc

(NYSE:DEO)

4.11%

10.50%

AbbVie Inc.

(NYSE:ABBV)

1.30%

3.79%

Silver Wheaton Corp.

(SLW)

-1.74%

7.58%

Starbucks Corporation

(NASDAQ:SBUX)

-1.95%

5.56%

General Electric Company

(NYSE:GE)

-3.69%

5.10%

V.F. Corporation

(NYSE:VFC)

-7.94%

8.45%

Gilead Sciences Inc.

(NASDAQ:GILD)

-18.23%

19.13%

Cash

$

5.93%

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am/we are long EA.

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.

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