There was a time when video game stock Electronic Arts (ERTS) was racking up the profits as easily as Pac-Man chomping those little yellow dots. ERTS made former football great John Madden into “that video game guy” to a new generation. It helped wannabe musicians fake it like rock start with Rock Band. Electronic Arts made video games cool to investors.
Then the bottom fell out. The video game company’s shares have sunk 63% over the last three years while the NASDAQ has been pretty flat. Electronic Arts has struggled to grow its sales, with some forecasts for the current quarter looking for as much as a 39% decline in revenue for ERTS.
Electronics Arts is one of the few big-time sponsors that have stood by Tiger Woods in the wake of his infidelities late last year – and there’s no big mystery why. ERTS leadership has to roll the dice to turn things around. And while Tiger may be bad branding for some, Electronic Arts really doesn’t have much to lose.
First, let’s look back at the company’s decline. There’s plenty of blame to go around for the decline of Electronic Arts sales and earnings. The recession cut into gamers’ pocketbooks. ERTS execs failed to realize the potential of the Nintendo (NTDOY) Wii when it hit the market at the end of 2006, and have been struggling to produce enough games to gain a decent share of Wii gamers. And of course the company had grown too cumbersome thanks to its success, with hordes of satellite video game studios.
Now let’s look at the current landscape. Electronic Arts has cut back on its overhead, closing it’s EA Japan office, EA Chicago office and Pandemic Studios branch all in the past three years in an effort to consolidate operations. The company has hoarded $1.1 billion even as sales have been weak, and is poised to make something happen. And most importantly, the company is pulling out all the stops to make 2010 a banner year for releases.
Here’s where Tiger comes in. Electronic Arts launched a free online golf video game, Tiger Woods PGA Tour Online, this week as Tiger Woods made his much-hyped return to competitive golf at the 2010 Masters at Augusta.
Tiger is a huge draw this week, and news outlets are abuzz with talk of the #1 golfer in the world’s shot at redemption on the course and in the public eye. You just can’t buy press like that. Some of the media hype is sure to include the ERTS offering.And let’s not forget that the latest iteration of Tiger’s EA Sports golf video game is just weeks from release. Tiger Woods PGA Tour 11 will hit stores at the beginning of June, and is you can bet the press machine will still be rolling whether Tiger wins or loses at the Masters.
So what does this all mean for Electronic Arts? Well, hopefully it means that the company can break out of its sales slump. In 2009, the EA sports video game Tiger Woods PGA Tour 10 for the Wii sold just 272,400 units in North America, fourth place for the month in overall sales. The title did not make the top 10 positions for other platforms for the monthaccording to video game industry experts at NPD Group.
ERTS is building momentum with some other video games released this year, so it really needs Tiger’s free online golf game and his yearly PGA Tour video game to help keep the company on a clear path the growth. The video game company moved over 2 million units of its Battlefield: Bad Company 2 title as of mid-March, and the final numbers could place it as the best selling video game for the month. And an EA Sports soccer game for release around the World Cup could be a big hit.
But it won’t be easy going. The stock’s 2011 price to earnings ratio of 31 doesn’t look cheap to many traders, and after guiding down and missing holiday sales numbers during one of the few bright spots for the video game industry last year ERTS is going to have to prove itself on the balance sheet in black and white.
Tiger Woods’s free online golf video game and his annual Tiger Woods PGA Tour title could play a lead role in the resurgence of Electronic Arts. On the other hand, if the video games flop it could be just the latest chapter in the disappointing sales history of ERTS.
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