Electronic Arts‘ flagship online game, Star Wars: The Old Republic, isn’t doing so well, but the big video game publisher is so well diversified that the impact on the company’s bottom line isn’t as bad as it could have been, analysts say.
EA chief executive John Riccitiello said in a conference call yesterday that the company’s diversification is paying off. Even though Star Wars: The Old Republic is missing expectations, the company’s earnings didn’t fall apart and guidance was only slightly lowered for the full fiscal year. That shows that the company’s smaller-scale efforts, such as an expansion into social and mobile games, are starting to add up and make a difference in the larger outlook for EA.
The company is a kind of guinea pig in that it is racing into digital games faster than any other rival in the industry. If the move pays off, then it will show that old-guard entertainment companies are capable of making a transition into the modern world of social entertainment.
But so far, EA’s flagship is taking on water. Star Wars, which took more than six years and an estimated $200 million to make, is bleeding subscribers. It had 1.7 million subscribers at the outset but dropped to 1.3 million in the fourth fiscal quarter and to under 1 million in the first fiscal quarter announced yesterday.
EA now plans to add free-to-play options for Star Wars in November. Analyst Michael Pachter of Wedbush Securities said the free-to-play option should result in long-term incremental growth and margin expansion for the game.
Arvind Bhatia, an analyst for Sterne Agee, said that EA beat expectations, once adjusted for Battlefield 3 Premium accounting, which required EA to defer subscription revenue until the fourth fiscal quarter ending March 31, 2013. The reduction in guidance wasn’t as bad as expected, Bhatia said, and more of the year’s revenues will now fall in the second half of the year.
“It appears EA’s diversified model is helping it in the ongoing industry transition,” Bhatia wrote in a research note. He reiterated his “buy” rating and maintained his target stock price for 12 months out at $17 a share. EA is trading around $11 a share.
EA is counting on a deft shift to digital revenues as its retail business of selling $60 games to hardcore games slows down. Pachter estimates that EA’s digital revenues will grow from $1.2 billion in the year ended March 31, 2012 to $1.7 billion in the 2013 fiscal year and $2.2 billion in the 2014 fiscal year. Pachter is maintaining a 12-month price target of $29 a share.
Ben Schacter, an analyst at Macquarie Research, said EA’s stock would get a bounce because its news wasn’t all bad, although he called the Star Wars game “clearly a disappointment, to put it mildly.” Yesterday, EA said it would buy stock back from investors in order to boost the price. This $500 million stock buyback will likely help the stock as well, Schachter said.
“The question is, during the transition, can this digital revenue lead to meaningful improvement in margins, and can [EA’s] core franchises have a sustainable competitive advantage on the new platforms? Both of those issues are still unclear and given the company’s track record, we prefer to wait on the sidelines,” Schachter said.
Schachter said that investors are apathetic about video game stocks now, but since the stocks have fallen so much, investors looking for a good deal may now be interested in EA. Overall, Schachter raised his price target from $15 to $18 a share.
Atul Bagga, an analyst at Lazard Capital, said that EA is executing solidly in growth areas such as mobile and free-to-play games.
“We continue to see EA as a transformation story from games-as-a-product to games-as-a-service, which we believe could drive margin expansion, reduce earnings volatility, and as a result drive multiple expansion,” Bagga wrote in a research note.
Bagga is optimistic about the prospects for Star Wars: The Old Republic as a free-to-play game. He said EA could be an attractive acquisition target for media companies looking to strengthen positions in the video game space or Asian companies looking to expand in Western markets. He maintained a buy rating on EA with an $18 price target.
Colin Sebastian, an analyst for R. W. Baird, said it was an uneventful quarter with in-line results. He lowered his price target to $15 a share, largely because of declining prices for game industry stocks.
“However, we continue to be encouraged by EA’s digital progress and still see potential catalysts unfolding later in the year,” Sebastian said in a research note. “With the iron in multiple digital fires, EA retains a unique portfolio of digital opportunities ahead. In particular, we believe that EA Sports and Battlefield offer upside potential from an increasing mix of online revenues.”