At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and “initiating coverage at neutral.” Today, we’ll show you whether those bigwigs actually know what they’re talking about. To help, we’ve enlisted Motley Fool CAPS to track the long-term performance of Wall Street’s best and worst.
Who’s hot, who’s not — in videogaming stocks
With Sony Corporation (ADR) (NYSE:SNE), Microsoft Corporation (NASDAQ:MSFT), and Nintendo Co., Ltd (ADR) (PINK:NTDOY) all in the process of updating their gaming consoles, and apps developers coming out with new “casual” games for smartphone users just about daily, it’s been a busy week for investors in the videogaming arena. Analysts are busy picking the next round of winners and losers and, already, we’ve seen three notable ratings changes this week. Here’s how they look:
Zynga Inc (NASDAQ:ZNGA)
The most recent ratings switcheroo of note was Bank of America’s downgrade of social gamer Zynga, which came out yesterday. Pointing to a Zynga’s 42% run-up since the year began as evidence that pretty much everything good that could happen for Zynga Inc (NASDAQ:ZNGA) has already been priced into the stock as if it had already happened, B of A cut the stock to neutral.
At this point, the banker says only “a hit new social PC game” could really add value to the stock, and that’s both “unlikely and difficult to predict.” Perversely, the risk of rivals attacking Zynga Inc (NASDAQ:ZNGA) with new real-money poker-playing products is almost certain to arise, and that could hurt investor enthusiasm for the stock.
Long story short, with no profits to recommend it, and no profits likely before 2016 at the earliest, there’s really no reason to rush out and buy this one today.
Electronic Arts Inc. (NASDAQ:EA)
Also getting the sharp end of the downgrade stick this week is Electronic Arts, which suffered a downgrade to “hold” at the hands of Needham & Co. Tuesday.
Needham worries about the timing of CEO John Riccitiello’s departure, coming as it does right after a sales warning — and, indeed, after a whole “series of setbacks [that] underscores the industry’s difficult transition to new platforms, business models and genres.” The analyst is cutting its earnings outlook by $0.15 in 2013, and by $0.10 more in 2014, to $0.80 and $1.15, respectively.
Now, granted, that still suggests we could see EA double its per-share earnings over the course of the next two years. On the other hand, though, based on what EA is actually earning today, the stock looks expensive at 32 times earnings, and a 13% projected growth rate. Fact is … even if you take EA’s earnings double as a given, I’m not sure the stock would be a buy even at the implied price of 15-times 2014 earnings.
Result: Shareholders might not like the fact that Needham cut EA to “hold.” I think they did EA a favor by not going the next logical step, and cutting the stock all the way to “sell.”