Electronic Arts

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tsanalysis
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I think all the cards are

I think all the cards are already on the table, so to speak, with EA. That is, nearly all the arguments on both sides have been made and are widely known. So now price becomes more of a determining factor. So I'll ask what I asked in the TTWO thread - time to buy?

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darrens
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They've come down a long way

They've come down a long way but I'm struggling to find a reason to buy EA simply because their release schedule this year is so un-exciting. I'm not expecting MOH:Warfighter or Crysis 3 to be huge hits so you're back to the old perennials (FIFA, Madden) and the market being so weak is not going to do those titles any favours.

I'm probably neutral on EA at the moment given their fundamentals don't make them a compelling buy imho.

tsanalysis
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I am getting very tempted by

I am getting very tempted by EA at these levels. Whereas the other "healthy" publishers (ATVI, TTWO, Ubisoft) are all still above their lows of the past several years, EA is at a 13 year low.

That alone is not enough to make EA attractive to me, however. I still firmly believe in EA's strategy of extending and connecting their franchises across all platforms. And EA has more franchises that I am confident people will still be playing 5-10 years from now (no matter what form it takes - console, PC, mobile, streaming, premium or free to play) than any other publisher.

Honestly, I cannot say with great certainty if people will still be playing Max Payne, Bioshock, Borderlands, LA Noire, or Red Dead 10 years from now (I am fairly confident they will still be playing GTA though). I cannot say with great certainty if people will still be playing Splinter Cell, Ghost Recon, Just Dance or Assassin's Creed 10 years from now. I cannot even say with great certainty if people will still be playing Call of Duty, Diablo, Skylanders, or World of Warcraft 10 years from now. I think a new free-to-play shooting game could come out of nowhere and dethrone Call of Duty and Battlefield. I think a new free-to-play MMO could come out of nowhere and dethrone World of Warcraft.

However I am fairly certain that people will still be playing FIFA and Madden 10 years from now. I just have a really hard time seeing a competing soccer game dethroning FIFA or a competing football game dethroning Madden. Same with Tiger Woods, NHL, NCAA Football, Fight Night, and now UFC. I am also fairly certain that people will still be playing The Sims, SimCity, and Need for Speed 10 years from now. I am even fairly certain that people will still be playing Star Wars The Old Republic (in free to play mode) 10 years from now - because of the license there just cannot be a competing Star Wars MMO. I also think some of the PopCap franchises like Bejeweled and Peggle and Plants Vs. Zombies will be evergreen.

So that is what sets EA apart for me as an attractive investment here. I was re-reading a book on Warren Buffett recently, and if he does not have confidence in a company's future cash flows he does not attempt to assign a value to the company. It may not be the exact same case here, but EA has more franchises that I am confident people will still be playing and will still be generating cash flow 10 years from now than any other publisher. Also, down at the prices EA is at now, with EA's substantial cash reserves, they could initiate another stock repurchase program and make a not insignificant dent in the number of shares outstanding.

I have been watching both EA and TTWO especially closely of late to go long, and while I may still go long TTWO for a shorter term trade on GTA V hype, I think EA is the better longer term play due to those two factors (more consistent franchises/future cash flows and larger cash balance relative to market cap).

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darrens
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I was wondering where you

I was wondering where you were going with that post but it all became clear when you started talking about FIFA, Madden and all the sport licenses. I totally agree with that although I'm less sure about Fight Night and UFC and don't necessarily agree with the rest.

However, I'm struggling to feel any warmth towards EA. On fundamentals it is modest but not exactly cheap and the line up this year looks dull. The only flicker of interest is that the latest NFS did get a very good reaction at E3 but I can't find anything else in their line-up that could be a big "breakout" hit.

tsanalysis
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So silly. A Citigroup

So silly. A Citigroup analyst downgraded EA today, after shares have declined around 50% since his upgrade of EA to buy last November near the peak. I had to make a post about it at my blog:

http://www.tsanalysis.com/2012/06/a-perfect-example-of-the-uselessness-o...

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darrens
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Analysts recommendations

Analysts recommendations simply provide short term buying/selling opportunities.

darrens
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It's been a while since we

It's been a while since we talked about EA but their share price performance has been impressive in recent times and they are approaching a 52 week high. I think they have a very defence against the console transition which is their sports games. Whatever happens people will still want to play FIFA, Madden and so on so in some ways they are a good defensive bet.

However, the rest of their portfolio is disappointing. Medal of Honor is probably now dead following poor sales. Dead Space 3 (out today) is only hovering at 80% on metacritic which is very worrying given where we are with the current generation of consoles. It's very difficult to get excited about Army of Two or Crysis but the Sims may do well in a steady sort of way.

Put it all together and I'm not quite sure why EA's price performance should have been so strong over the past few months but if you're an investor you'd be very happy. After all the results are done I'll update the publisher valuations thread but I suspect we'll see EA on pretty high multiples against its peers without a really good reason why.

tsanalysis
tsanalysis's picture
EA is now on my 'buy on dips

EA is now on my 'buy on dips list'. Riccitiello bought $500,000 worth of shares around $16 the other day. That is the signal I have been waiting for. Riccitiello has been excellent in his timing of EA's stock, going all the way back to when he was COO before leaving to head Elevation Partners. He doesn't make purchases often, and he doesn't make token purchases either. When he buys it is usually a substantial amount and EA performs well afterwards.

Besides the insider purchase, this is going to be a Battlefield year, so I am fairly confident that packaged goods will show growth this year with the easy comp vs Medal of Honor. EA said that the reveal for BF4 will happen in 90 days or so. And then of course the excitement, at least, of XBox 720/PS4.

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darrens
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Battlefield 4. It will

Battlefield 4. It will obviously massively outsell MoH but it falls into the category of "current-gen games which aren't GTAV" and I just don't have a feel yet for whether the market will support the big hits for another year.

darrens
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Well, looks like I should

Well, looks like I should have gone with my own gut here because John Riccitiello has resigned with immediate effect and they're warning results will be at the bottom or below guidance.

The stock was being lifted by JR's insider buys and all of that needs to unwind out of the price because he clearly got it wrong this time (unless he sold in the last couple of weeks). This could be painful tomorrow.

Update 1: EA was actually up in after-hours trade despite the poor forecast. Given that EA's share price is at a 52 week high and has rise nearly 30% in the past few months it's difficult to say that the bad news was in the price. So, the question is, was JR thought of so badly by the markets that his leaving will boost the share price? I find that slightly bizarre given that it was his stock purchase that was a major factor in the EA's recent strength but today's trading is going to be fascinating.

Update 2: EA down about 8.5% against the other stocks in the sector being down around 2.5% so it does seem that the after hours jump last night wasn't indicative.

tsanalysis
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I am kind of waiting for the

I am kind of waiting for the dust to settle, but EA still looks interesting to me as a potential long. I think the low end/missed guidance was due to under-performance by the three new releases this quarter - Dead Space 3, Crysis 3, and Army of Two Devil's Cartel, none of which really surprised me.

However I still see the same potential catalysts that I did before. The Battlefield 4 reveal will be soon, and I will be watching to see how strong interest is after the reveal. EA botched yet another launch with SimCity, but they will eventually sort out the problems and I think the game will have long legs. I expect the sports games to continue performing well. EA is still really strong in mobile. And lastly EA's broad portfolio should benefit them on the PS4/XBox 720 launches. Riccitiello bought at $15.90, so EA is still above that, and I think by year's end his purchase could still look pretty smart.

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darrens
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Yes, I've no doubt the missed

Yes, I've no doubt the missed guidance was from those three titles since they all disappointed and that was why I couldn't quite work out why the stock was rallying so hard. Okay, the whole sector is coming off its lows as people look forward to next-gen but EA stood out as the only big publisher that disappointed in holiday 2012 and 2013 didn't seem to be getting any better.

I agree that Battlefield 4 should be big this year and that may make for some good year on year comparisons but it seems like too far away to be buying for that now. EA have really struggled with their portfolio outside of the sports franchises and that doesn't look like changing any time soon and that's why I can't really get excited about them as an investment at these levels.

tsanalysis
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I am not as sure about EA as

I am not as sure about EA as a possible long any more. Dead Space 3 under-performed slightly. Crysis 3 under-performed more. Army of Two will seriously under-perform. Tiger Woods 14 looks like it will be down quite a bit year over year. I think FUSE in May will be a disappointment And hype for Battlefield 4 after the reveal doesn't look anywhere close to what existed for BF3.

EA can survive one or two games under-performing, but the majority, including most importantly BF4? Unless the market is willing to just look past 2013 already, I have become more negative on EA.

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darrens
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Looks like EA is really all

Looks like EA is really all about BF4 this year. The markets seem happy to look past the disappointment of the past 6 months but BF4 is surely going to have a big impact on the share price one way or the other.

To be honest, I can't think of (m)any game reveals that have excited people beyond Watch Dogs and GTAV and BF3 was a big win for the series and ensured that BF4 will have a huge following even if nobody got that excited about the BF4 announcement.

Having said all that, it is pretty poor that EA is still so reliant on so few titles and that the following year is really going to be dictated by one game beyond their sports franchises. Perhaps that's why JR had to go but if things aren't right in EA with regards to developing blockbuster games then that isn't going to change any time soon.

For that reason, EA could end up being a decent short as a hedge against long position in other publishers or just a decent short all on its own.

darrens
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EA results tomorrow and they

EA results tomorrow and they're going to be bad but the share price is rallying so maybe the markets are ready and prepared for it. Two "good news" announcements today with Sims 4 coming in 2014 and a multi-year deal for EA to publish Star Wars games.

I always think that when you get some good news a day or so before results that signals the fact that the results aren't going to be any good.

Of all the publishers I think EA are in the weakest position, especially given the rally in the share price. Their line-up is weak and they will rely on Madden and FIFA (again) with the added bonus of Battlefield 4 this year. The tricky thing though is to try and guess how the markets see them. JR has gone so any bad performance at the moment can be blamed on him with the "new" team saying they are turning it around but it will take time.

Still thinking of EA as a short but it just seems bulletproof at the moment.

darrens
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EA results were very positive

EA results were very positive. Well, not the results which were pretty much in-line but their forecasts and general bullish outlook. For FY14 they are forecasting sales of $4bn and income of $1.20/share. That contrasts with FY13 sales of $3.8bn and income of $0.84/share.

So, in other words they see FY14 sales as being up 5% and income up a whopping 43%. How will they do that? They are a bit coy in their statement but they do say they are going to hold their costs to FY13 levels and although they don't say it, the next-gen business should be on higher margins.

All in all, it looks like the FIFA/Madden juggernaut keeps on rolling with the extra bonus of Battlefield 4 and some next-gen excitement thrown in. EA are struggling enormously with generating significant new ip, despite some costly attempts, and it's quite difficult to get excited about a publisher which doesn't appear to be able to grow beyond it's core franchises.

EA is really all about FIFA and Madden. 'Twas ever thus.

darrens
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Despite what looked like

Despite what looked like rather mediocre results and a good, if not that exciting, outlook EA shares have powered ahead since the results: up $4 or about 20%. I can't exactly explain that although perhaps their very bullish words (if not numbers) about their future, the change at the top and the fact that EA were once the biggest company in the industry have excited investors. I'm not entirely sure that I buy any of those arguments but I can't think of any other reason for the rise.

We still have to wait and see what happens to Activision who were the opposite of EA. Great results, raising forecasts but very cautious words about the future. They were down considerably on the back of the news that World of Warcraft numbers were falling fast but then rebounded the next day.

Take Two results on Monday and Ubisoft on Wednesday and it's very difficult to predict how the markets will react to what they say. It's always been tricky to try and guess how the markets will react, particularly in the short term, but how things have gone since last week's results has me fairly baffled.

Perhaps I'm not the only one whose a bit puzzled since one of the EA sports execs decided to sell all (yes, all) his shares on the post-results move.

tsanalysis
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I think the outlook is the

I think the outlook is the main thing, and the fact that there actually seems to be something to back up the outlook. Battlefield 4 and The Sims 4 in the same year is a pretty good start. Both are among EA's biggest franchises and are wholy owned IP so the profitability is good. FIFA 14 will be a World Cup year again (although I am not sure if that title will ship in fiscal '14 or not). There is also the return of NBA Live. Even though I don't expect it to gain much traction vs NBA2K its first year back, EA has been incurring the development costs the past few years so any sales will be a plus. Star Wars the Old Republic stabilized and even picked up a bit with the free to play option. Then add in the new console excitement and the job cuts which markets always seem to like.

I wish I had bought when Riccitiello did, I'd be sitting on a 40% gain right now. Maybe he knew when he bought that he was going to resign and large job cuts would follow which would lift the stock. Unfortunately the stock started moving soon after he bought and I thought I'd have more time to go long.

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darrens
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The outlook was "okay" in

The outlook was "okay" in terms of numbers. They're talking about revenue up slightly but profits up a long way because of cost-cutting. I wouldn't call that, in quantitative terms, particularly worthy of a 20% rise in the share price. They were very bullish in their words but, again, that's all really window-dressing because it wasn't coming through in their sales figures.

You could actually argue that EA's numbers would have looked more consistent with Activision's words.

I think NBA Live has lost the war so I can't imagine that doing any serious numbers. FIFA World Cup '14 (or whatever they'll call it) will be in EA's FY15 since it's a summer tournament. I agree that BF4 will do big numbers.

But that's all besides the point given they are only forecasting sales up 5% on the previous year. I agree they'll do it, and may well even beat, but a company making more profit by cutting costs doesn't normally get anybody particularly excited.

tsanalysis
tsanalysis's picture
Finally some excitement for

Finally some excitement for EA? As I mentioned in the ATVI thread, Titanfall was the big winner at the E3 Game Critics Awards, winning 6 awards including Best of Show. Also, Need for Speed Rivals won Best Racing Game against some pretty stiff competition which included Forza 5 and Gran Turismo 6. Plants Vs. Zombies 2 is finally coming this summer. Add those on top of Battlefield 4, The Sims 4, and the EA Sports titles, and things seem to be looking up for EA.

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darrens
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Yup, Titanfall looked very

Yup, Titanfall looked very good and "it's from the Call of Duty guys" so something to get excited about. I'm ignoring all driving games at the moment because it feels like a diminishing, very niche (and increasingly crowded) genre so NFS Rivals, meh.

Battlefield 4 looks very good and should sell very well and the sports titles (notably FIFA and Madden) look very solid and should be next-gen staples.

So, I don't see any "whoops" moments coming up for EA in the short term but until they demonstrate that they can generate and build new ip I think they are (more than) fully valued at their forecast p/e. They've been given a big stock price boost by Riccitiello going but they haven't got a replacement and they're still the same company as when he was in charge.

I'm struggling to build any excitement for EA at these prices.

darrens
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EA up nearly 8% after hours

EA up nearly 8% after hours following their solid Q1 results. Results were good but on a forecast p/e of over 20 that seems rather toppy for a company with their track record and still searching for a CEO.

They are the most expensive (on a forecast p/e ratio) of all the publishers and it isn't immediately clear that there are good reasons for that which makes me think at some point the gap will be closed by either EA falling back or the others catching up.

darrens
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I continue to wonder at EA's

I continue to wonder at EA's resilience to bad news. First there was the disappointment of Madden sales and now we've had the disappointment of FIFA sales and EA hasn't really been affected by either.

There are obviously some mitigating circumstances which would suggest that the reasons are external to the games themselves (i.e. console transition and GTAV) but that doesn't change the fact that EA are probably going to make less money from two of their biggest franchises than they have done in previous years.

There are obviously repercussions for the other publishers if, as some have suggested, consumers are holding of buying games on current-gen and waiting for next-gen and they aren't specific to EA.

But as things currently stand, EA are the most affected in terms of trading performance and seemingly not affected in terms of stock performance.

Is this because there's a view that next-gen sales will fill the gap on current-gen? That may be true next year but not this. In which case EA, and possibly the other publishers too, could be heading for some bad news when they report calendar Q413.

darrens
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EA down about 15% since I

EA down about 15% since I wrote this post wondering why EA had been so resilient to several bits of bad news. So, I'm kicking myself a little for not putting my money where my mouth was but I'm always very hesitant on betting that stocks will go down.

I am wondering about Titanfall now. I think it is probably the most anticipated of all next-gen games and with both consoles selling well things are looking good for this being the first "must have" next-gen game. The rather obvious fly in the ointment is that Titanfall is an Xbox One exclusive. Obviously this guarantees Microsoft's support but whatever deal they've done with EA I don't believe it makes up for Titanfall not being on PS4 too.

This seems particularly pertinent given that the PS4 appears to be much faster out of the blocks than the Xbox One (although I'm sure Microsoft will be hoping that Titanfall will change the balance).

As I laid out here EA remains on a relatively high valuation despite the recent drop so it is certainly possible that the success of Titanfall is in the price. While Titanfall will probably give EA some support going forward, it is difficult to be that bullish about EA given their very high p/e and disappointing recent track record in terms of execution.

Assuming they've been conservative in their forecasting they could well survive the lacklustre sales and technical issues of Battlefield 4 but until Titanfall (and the run up to it) there doesn't seem to be a compelling reason to think EA shares will rally unless they can surf any next-gen wave which builds up.

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