Electronic Arts: A Battle Royale

08/09/2018 5:00 am EST

Focus: CONSUMER

Joseph Bonner

Senior Analyst: Communications & Technology, Argus Research Corporation

We are raising our rating on Electronic Arts (EA) following the company’s recent fiscal 1Q earnings report. Management’s guidance appeared to disappoint investors. However, we believe that the pullback provides a favorable entry point, asserts Joseph Bonner, analyst with Argus Research.

While the specter of “Fortnite’s” success hangs over the videogame industry, Electronic Arts is entering its relatively stronger September and December quarters — the season for its major releases.

The company has a strong portfolio of sports videogames, and continues to release new titles and expand into live events. With the acquisition of Respawn Entertainment, it has also added another star game developer to its stable.

We are raising our FY19 EPS estimate to $5.03 from $4.99 and maintaining our FY20 forecast of $5.50. Our estimates imply two-year average EPS growth of 12%, below our five-year earnings growth rate forecast of 15%.

CEO Andrew Wilson has highlighted EA’s three key strategic goals: expanding the company’s player base, deepening the engagement of players, and enabling access to the company’s games through a wider range of delivery platforms.

Success in achieving these goals depends on management’s building the company’s core technology base (as exemplified by the “Frostbite” game engine), constantly developing new and refreshing older game titles, and expanding into a broader range of delivery platforms.

The company is also growing the player base in part through geographic expansion, both by making games that appeal to international audiences and by providing localized tweaks, such as free-to-play sports games in China and South Korea.

The company recently launched FIFA Mobile in China. It also has a range of strategies for deepening player engagement, including the use of expansion packs after the initial release of a game, live event esports, and new mobile delivery platforms.

Looking ahead to FY19, management expects the year to be even more backend-loaded than usual due to the timing of game launches.

Growth drivers are expected to come from the FIFA19 and FIFA Ultimate Team release; subscription growth for mobile games; and the holiday refresh of the “Battlefield” shooter game, “Battlefield V.” Management is also promising a “Battle Royale” mode for “Battlefield V” in the manner of “Fortnite.”

Our financial strength rating on EA is High, the highest point on our five-point scale. The shares have traded between $100 and $150 over the past 52 weeks, and are currently just above the midpoint of the range. We are raising our rating on the stock to "buy" and setting a target price of $155.

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