Foolish Forecast: Happily EA?

Electronic Arts (Nasdaq: ERTS  ) reports second-quarter earnings Thursday night. The first quarter was a disappointment, but EA has been cooking up some fresh content lately. The stock now looks like a solid value play.

What Fools say:
Here's how EA's Motley Fool CAPS rating stacks up against some of its peers and competitors:

 

Market Cap (millions)

Trailing P/E Ratio

CAPS Rating
(5 max)

Activision Blizzard (Nasdaq: ATVI  )

$15,600

89.1

*****

Electronic Arts

$8,500

N/A

****

Konami (NYSE: KNM  )

$2,400

12.8

***

Take-Two Interactive Software (Nasdaq: TTWO  )

$880

8.1

****

THQ (Nasdaq: THQI  )

$500

N/A

**

Data taken from Motley Fool CAPS on 10/29/2008.

CAPS All-Star ikkyu2, who owns the highest score ever amassed on an EA rating, is critical. "Great company, great products, questionable management, lousy margins, poor profitability, terrible valuation. Thumbs down."

But fellow All-Star DemonDoug disagrees. "Hollywood in the 1930s was booming. Video games today are what movies were in the 1930s. Electronic Arts is the No. 2 independent videogame company (No. 1 is ATVI), and with stellar perennial winners," it should keep making money.

What management does:
EA has not made a quarterly profit since Christmas 2006. However, given the split between crummy net income and jumpy but fairly decent cash flows, that might simply be smart accounting since the tax man cares only about the income statement. Also, don't forget that the sales trend is picking up steam.

Margins

3/2007

6/2007

9/2007

12/2007

3/2008

6/2008

Gross

60.8%

60.6%

56.8%

49.9%

50.8%

52.5%

Operating

1.8%

(0.4%)

(10.2%)

(13.7%)

(6.7%)

(3.4%)

Net

2.5%

0.8%

(6.6%)

(12.3%)

(12.4%)

(10.2%)

FCF/Revenue

7.1%

3.0%

0.5%

4.6%

6.9%

3.4%

Growth (YOY)

3/2007

6/2007

9/2007

12/2007

3/2008

6/2008

Revenue

4.7%

2.5%

(5.7%)

1.0%

18.6%

32.6%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
DemonDoug has a good point: EA owns some of the biggest franchises in video game history. Sports games like Madden NFL and Tiger Woods PGA have no serious competition. The Sims, with its many sequels and expansions, is the best-selling game series ever in the world of PC games. Up-and-comers like Rock Band and Spore seem destined to sprout profitable sequels for years to come, too. The occasional DRM-related backlash may have created a piracy beast, but it sure didn't kill official sales. Even the Warhammer franchise is off to a good start.

And yet EA is playing second fiddle to Activision in the long run, and to the Nintendo (OTC: NTDOY.PK) juggernaut in October. It's dangerous to draw long-term conclusions from the seasonally weak summer quarters, but EA's stock price has been hit harder than most recently and the shares sure look cheap. In balance, this is a giant in the gaming industry that won't go away for a long time and will get in the occasional home run among its many three-and-outs. The unusual value-based opportunity seems to outweigh the minimal risks.

Take-Two Interactive Software is a Motley Fool Rule Breakers pick. Nintendo, Electronic Arts, and Activision Blizzard are Motley Fool Stock Advisor picks. Try any of our Foolish newsletters today, free for 30 days. Or just sign up for a free CAPS account to find out what all the cool Fools are saying about your favorite stocks.

Fool contributor Anders Bylund owns shares of Take-Two, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is the Punxsutawney Phil of financial forecasting.

Stock news, financial commentary, and your daily dose of Foolishness: Get plugged in to The Motley Fool on Twitter!


Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On October 31, 2008, at 4:02 PM, WritinReg wrote:

    Any (Motley) FOOL that believes ERTS is the long term stock to invest in is a FOOL period for not knowing gaming, gamers, and todays modern stock buyers. Used to be investors and gamers were two different entities. And although there are still many stock brokers and investors that believe video gaming is just kid stuff, if they actually open their eyes and peer past the ticker every now and then they might see that the largest growing numbers of gamers are those "kids" that used to propel mommy and daddy into buying them the next big video game for their Gameboy. As pcs got smarter, cheaper, and more widespread as a "chicken in every pot", while little Johnny was playing Mario Brothers and Zelda, mommy and daddy were in the home office or library enticed by first person shooters like Doom and Half Life or trying the complexities involved in building and running an entire city in Sim City. It was not little Johnny who propelled the teen and mature rated games to success (like the Best selling game of all time - The Sims), but mom and dad, and eventually grandma and grandpa.( The average "Simmer" is 25-45 years old. So it is for WOW players as well. I am older than that.) All the same people who invested their future into stock portfolios.

    Eventually little Johnny grew up, still gaming and invested in stocks too. Smartly these gamers - old and young alike favored stocks of the products they use. You buy EA games, get your friends to buy EA games, it makes sense to buy ERTS stocks.

    But when EA began to pull the rug out from under these gamers by cloaking good games in bad DRM that messed up a families home office pcs and then gave these same customers bad customer assistance, called these gamers pirates because they complain, and just plain fail to see the real reason their stocks are failing is because the same gamers the company is peeving off is the ones who have not just bought their games, but bought their stocks too; well in my books that means not just the bad economy is hitting ERTS over the head. What makes the whole deal ridiculous is the fact EA's head honcho will not admit his decision to move all EA titles over to Securom 7 DRM was a bad idea or will he even let himself SEE the real numbers of angry gamers pulling the rug out from under his slimy feet who are first selling off their erts stocks and second looking for other NON-Securom 7 games to fill their idle time with, because in a bad economy, a video game is still a good deal to spend a little money on when adults are craving a break, compared to a night out to the movies and dinner. Maybe when EA opens their eyes and sees that the other companies not treating their customers badly like this, are not falling as deeply into this recession hole as EA, they might finally come to their senses. We are the hands that feed EA. We are the buyers and players of both the stocks and the games, so wise up EA. When your DRM disables our pcs, we aren't buying your games or your stocks - we move our money else where, especially in this painful economy.

  • Report this Comment On November 12, 2008, at 12:44 PM, ikkyu2 wrote:

    Anders, you quoted my "score leader" blurb, which is limited by space.

    It's true that the company is as much of a stalwart as you can imagine in its sector, which is video gaming. But come on - this is software. Software is not like aggregate or coal mining; it is a fly-by-night business. Companies that don't perform get executed and have to cease operations.

    It's true that the company hasn't turned a profit in a long time. Wonks I know point out that it's trading at about 7x "enterprise value," which is one way to value a company that consistently loses money.

    But now hold on a second. It consistently loses money, even with no debt to service. A lot of that is short-term investment losses - that are really staggering when you look at them in the 10-Q. What are these guys investing in? Maybe some director's side project? No way to tell.

    I don't understand how ERTS can be unprofitable. Their games are fun to play, they deliver on time, and they do all the things that they're supposed to do as a company that retails video games. Until I understand a) why they don't make a profit and b) why and when that situation is going to turn around, I don't much care to own a share of their business.

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