Electronic Arts’ Q2: The Sell-Side’s Take

Video game maker Electronic Arts, Inc. (NASDAQ: EA) reported second-quarter earnings Tuesday that largely exceeded projections.

The Analysts

• MKM Partners analyst Eric Handler maintained a Buy rating on EA and lowered the price target from $157 to $135.
• Atlantic Equities analyst Kunaal Malde downgraded EA from Outperform to Neutral and lowered the price target from $140 to $110.
• Jefferies analyst Timothy O’Shea reiterated a Buy rating and $139 price target.
• Morgan Stanley analyst Brian Nowak maintained an Equal-weight rating and lowered the price target from $122 to $111.

Key Highlights

EA reported several positive metrics in Q2, said Atlantic Equities’ Malde. They include:  

• A digital shift, with total net bookings that grew by 4 percent.
• The potential for new titles, as EA has increased expectations for “Anthem” and hinted at additional popular releases.
• A strong balance sheet, with $3.6 billion in net cash.
• Strong intellectual property.

“We continue to view EA’s best-in-class sports IP as some of the most durable video game content. Sales of the annual sports titles are probably roughly flat year-over-year despite the headwinds from increased competition this year. Non-sports IP can also surprise positively,” Malde said. 

FIFA

Growth in “FIFA 19 Ultimate Team” appears to be stalling, said Jefferies’ O’Shea.

Non-GAAP live services revenue declined roughly 27 percent quarter-over-quarter and missed the consensus estimate of $412 million, the analyst said. While the Weekend League increased its player count by 75 percent year-over-year, O’Shea said gamers are playing elsewhere.

“Where are those users spending time? Perhaps other games like ‘Red Dead’ or ‘Fortnite.’ That said, it’s clear to us that EA can still crush EPS numbers without ‘Ultimate Team’ operating at peak performance. But it’s certainly not what anyone wants to see.”

Value Drivers

“The current console upgrade cycle should drive a continued shift to digital revenue streams which represent higher margin revenue for gaming publishers,” said Morgan Stanley’s Nowak. EA is known for producing some of the most stable and diversified franchises in the history of gaming, like “Madden” and “FIFA,” the analyst said. 

A faster rollout of full-game downloads and continued success with extra content should serve as potential catalysts in the near-term, Nowak said. “Currently 30 percent of games are downloaded digitally, and we expect this to increase to 45-50-percent-plus in the next five years.”

Investor Trust

MKM’s Handler said four key events must occur for investors to exhibit further trust in EA: 

• Improved live services performance to drive growth into 2020.
• Strong review scores and sales from “Battlefield V.”
• A successful launch for “Anthem.”
• Revitalized mobile growth.

Price Action

EA shares were trading down 3.58 percent at $91.44 at the time of publication Wednesday. 

Related Links:

EA Shares Fall On ‘Battlefield’ Delay, Updated Guidance

‘Escaping The Penalty Box’: Wall Street Reacts To EA’s ‘Battlefield’ Delay

Photo courtesy of EA.