It’s not fun and games with Electronic Arts Inc. (EA) today. Not even the blockbuster Star Wars could provide any encouragement for shareholders. After all, in today’s early trading EA stock is off by 9%.
The main culprit, of course, was the disappointing earnings report. During the fiscal third quarter, Electronic Arts posted adjusted earnings of $1.83 per share and revenues of $1.8 billion, which was up about 26% year-over-year. Yet the top line was a bit off since the Street was looking for $1.81 billion (though profits managed to beat by 2 cents per share).
The current quarter guidance for EA was also somewhat tepid. Consider that the company is projecting revenues of $875 million and earnings of 40 cents per share. The consensus estimate, however, was for $915 million in revenues and profits of 50 cents per share.
It’s true that EA has a history of underpromising on its forecasts. So going forward, there may be some nice surprises. Let’s face it, EA has continued to show lots of momentum with its franchise titles, like Madden NFL 16, FIFA 16 and Need For Speed. In fact, the company is the top publisher on both Microsoft’s (MSFT) Xbox and Sony’s (SNE) PlayStation 4. EA has also been getting traction with its mobile business and the transition to digital revenues.
Can Star Wars Lead EA to Outperformance?
But of course, the big driver for the company has been its Star Wars: Battlefront title. In all, EA has racked up sales of a staggering 13 million copies. There was also a strong debut of the mobile app, Star Wars Galaxy of Heroes, which hit the No. 5 spot for downloads on the Apple (AAPL) appstore in 130 countries.
Meanwhile, the EA pipeline looks robust. During the next few months, the company plans to launch titles like Unravel, Plants vs. Zombies Garden Warfare 2 and EA Sports UFC 2.
Despite this, it’s a good bet that investors will be mostly focused on Star Wars. However, the problem is that it’s tough to gauge how long the strength will continue. No doubt, the title got a big boost from the holiday season, which may have essentially front-loaded sales. It’s this kind of uncertainly that is likely to keep investors jittery.
Something else: There are some legal limitations on the Star Wars title. For example, Electronic Arts is not allowed to use the charters like Rey and Finn from Disney’s (DIS) latest film, Star Wars: Episode VII — The Force Awakens. Instead, there will need to be a sequel — and the details on this have yet to be released.
Besides, EA stock staged a big rally of 10% since mid-January, which bucked the grueling correction in the market, and the stock is up nearly 200% since early 2014. As a result, the valuation also got somewhat toppy, with the price-to-earnings ratio reaching as high as 28. By comparison, rival Activision Blizzard (ATVI) sports a multiple of roughly 23.
Granted, EA is a best-in-breed operator in the gaming industry, with dominant positions across key platforms of PCs, console and mobile.
But going forward, investors should remain cautious. The slight miss on the top-line is certainly a danger sign and, yes, there could be more slippage if the mojo slows down on the Star Wars business.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
