How Low Will EA Go?

Shares of Electronic Arts (Nasdaq: EA  ) hit a 52-week low recently. Let's look at how it got here and whether dark clouds are ahead.

How it got here
The video game stalwart has been seeing rough times recently, in part due to the disruptive threat that mobile gaming represents on its core console gaming business.

For example, a recent report from market researcher NPD Group showed that domestic retail sales of video games fell 20% in February. The top title for that month was the latest installment of Activision Blizzard's (Nasdaq: ATVI  ) popular Call of Duty franchise, Modern Warfare 3, which was released late last year. EA has been making some mobile moves to mitigate the threat, like buying PopCap games last summer, the maker of infamously addictive mobile titles like Plants Vs. Zombies and Bejeweled.

EA also recently launched its Star Wars-themed massively multiplayer online role playing game, or MMORPG, to try and sway some of Activision's World of Warcraft players to the dark side. Star Wars: The Old Republic is off to a strong start, but subscribers could potentially fall off after the free trials expire.

Freshly public Zynga (Nasdaq: ZNGA  ) will be a worthy combatant as its free-to-play online social games gain popularity, and it also focuses on mobile growth, even if that means through acquisition.

EA's third-quarter earnings weren't too impressive, narrowing its GAAP net loss to $205 million with no revenue growth. On the heels of the report, CFO Eric Brown also unexpectedly resigned to become the CFO and COO of communications specialist Polycom.

There haven't been many positive catalysts for the company recently.

How it stacks up
Let's see how EA stacks up with some of its peers.

EA Chart

EA data by YCharts.

Other players in the video game industry aren't doing so hot, either, but let's look at some fundamental metrics for deeper insight.

Company

P/S (TTM)

P/FCF (TTM)

Net Margin (TTM)

ROE (TTM)

EA 1.4 57.4 (4.5%) (7.5%)
Activision Blizzard 3.0 16.2 22.8% 10.3%
Take Two (Nasdaq: TTWO  ) 1.6 NM (7.5%) (10.2%)
THQ 0.05 NM (30%) (174.0%)

Source: Reuters. TTM = trailing 12 months. NM = not meaningful.

Of these companies, Activision stands out above its gaming brethren, although EA doesn't have it as bad as THQ -- a company that was worth $2.4 billion five years ago and is worth just $35 million today.

What's next
Console gaming may be the next major industry to get disrupted by Apple, even as Microsoft and Sony are widely expected to release their respective next-generation consoles -- the Xbox 720 and PlayStation 4 -- next year, which could potentially reinvigorate the console gaming industry.

Lacking any near-term catalysts, I'm giving EA an underperform CAPScall today, too, because I think this stock is set to keep going lower.

Interested in more info on Electronic Arts? Add it to your watchlist by clicking here.

Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Microsoft, Apple, and Activision Blizzard. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Apple, Polycom, Activision Blizzard, Take-Two Interactive Software, and Microsoft; creating bull call spread positions in Microsoft and Apple; and creating a synthetic long position in Activision Blizzard. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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