Video game maker Electronic Arts (EA) reported stronger-than-expected fiscal first-quarter 2016 earnings results and raised its full-year guidance last night, as its high-margin digital business continues to grow.
EA stock was hardly electrified by the news, however.
Instead, Electronic Arts’ shares were flat Friday morning, likely prompted by a combination of disappointment over second-quarter guidance (and possibly even the magnitude of the full-year guidance hike), and the stock’s lofty levels thanks to a 50%-plus run for the year-to-date.
Still, investors needn’t be too concerned. While investors aren’t exactly jazzed about Q1 results, EA remains a buy — just on weakness.
Electronic Arts Earnings
On June 24, theflyonthewall quoted research firm Jefferies as saying:
“Electronic Arts looks well-positioned to benefit from stronger than expected sales of video game consoles and the transition to digital games, which carry higher margins than traditional video games.”
Those statements by Jefferies, which upgraded EA stock to “buy” from “hold” in the note, turned out to be prophetic.
Electronic Arts earnings easily beat expectations, with profits of 15 cents per share soaring over Wall Street’s bar of just 3 cents. Meanwhile, revenues of $693 million were an easy beat, with the consensus outlook coming in at $652.9 million.
The video gamemaker cited “ongoing strength” in its digital business and healthy catalog sales as two of the major reasons for its solid results. More specifically, EA said it generated 77% of its revenue from its digital business last quarter, adding that the large amount of digital game downloads boosted its gross margins. Overall, digital revs climbed 10% to $532 million last quarter.
For the full year, Electronic Arts increased its EPS guidance to $2.85 from $2.75 and raised its revenue outlook to $4.45 billion from $4.4 billion. Both its top- and bottom-line guidance were roughly in line with analysts’ consensus estimates.
Perhaps concerning was Q2 EPS guidance of 40 cents, which fell far flat of the consensus estimate for 67 cents. EA said increased R&D spending and negative foreign exchange trends would weigh on those quarterly results.
Still, the video game maker’s overall business looks healthy, as its net income rose to $442 million last quarter, up from $335 million a year earlier. While its revenue was off 11% year-over-year, that was “because we had no console launches this quarter, and the year- ago quarter included the launches of Titanfall for Xbox 360, EA Sports FIFA World Cup 2014 and EA Sports UFC,” according to CFO Blake Jorgensen.
Star Wars. That’s What Matters.
More important than Electronic Arts earnings, however, is the scheduled release of Star Wars: Battlefront, due Nov. 17. The game has received excellent reviews and should be able to effectively ride the coattails of the new Star Wars movie, which is slated to be released in December.
Star Wars: Battlefront has received very upbeat reviews from gaming sites and stock research firms alike. Jefferies wrote that the game “looks and plays great,” while Brean Capital was also enthusiastic, while GamesRadar, IGN.com and The Verge all publishing highly favorable reviews.
Investors should wait until EA stock reaches a better entry point, preferably in August or September, before buying the shares. Given the roughly 50% increase in EA stock so far this year — not to mention this summer’s anemic stock market — a more favorable entry point in EA stock will probably present itself in the next several weeks.
As anticipation about Star Wars: Battlefront game builds heading into the holiday season, and as strong sales figures for the product start to roll in, shares should head higher.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
