Electronic Arts Inc. (NASDAQ:EA) has rallied approximately 23% over the past week, putting its stock up 50% year-to-date. With this increase, is there any room left for investors to make money?
A big win that helped to drive Electronic Arts Inc. (NASDAQ:EA)’s climb was the guidance of 2014 earnings that were well above expectations; management guided 2014 earnings-per-share to $1.20, in comparison to the average analysts’ estimates of $1.10 per share.
Part of the run up in EA’s stock goes beyond revised guidance and includes its deal with Disney for the gaming rights to the “Star Wars” franchise, which is a major part of Disney’s recent purchase of Lucasfilm. Electronic Arts Inc. (NASDAQ:EA) plans to allow its in-house game teams DICE (Battlefield) and Visceral (Dead Space) to work on the Star Wars titles. However, I think the run up in the stock is overdone.
Electronic Arts Inc. (NASDAQ:EA) is expected to see revenues fall by some 7% in each of the next two quarters as no major game releases are slated, with no major game launches other than Madden Football and FIFA 2014 coming over the next three quarters. Major franchise releases, including a new Dragon Age game and Battlefield 4 were supposed to be released in 2013 but no official announcements have been made.
EA has been cutting staff and reorganizing studios lately in preparation for the rollout of new gaming platforms from Sony and Microsoft. The cuts will help the company to cut costs, allowing it to adapt to tougher market conditions.
One of the positives for Electronic Arts Inc. (NASDAQ:EA) is the rise of digital revenue, which was up 45% year-over-year last quarter. This presents a significant market for EA, with DFC Intelligence estimating that the online video game market will grow from $19.0 billion in 2011 to $35.0 billion by 2017; this is estimated to represent approximately 43% of total video game revenue at that point.
While EA was soaring last week, Activision Blizzard, Inc. (NASDAQ:ATVI) has seen its stock pushed down by as much as 8% despite posting decent EPS results. The company’s EPS for the first quarter came in at $0.17, compared to $0.06 for the same quarter last year and consensus estimate of $0.10 per share.
However, Activision Blizzard, Inc. (NASDAQ:ATVI) does own the major “Call of Duty” franchise, which competes directly with EA’s “Battlefield” games. For 2013, Activision plans to launch Call of Duty: Ghosts, the follow-up to the gaming industry’s top-selling game for 2012, Call of Duty Black Ops 2. Activision Blizzard, Inc. (NASDAQ:ATVI) should also have interim tailwinds until the next “Call of Duty” release thanks to the release of Heart of the Swarm, the expansion to Starcraft II which it released in 2010.
Consensus estimates also forecast a 48% increase in revenue for the 2014 fiscal year, following a 45% projected increase for 2013. The game maker trades the cheapest of the three major companies at only 7.2 times forward earnings, but it features strong key franchises on which it is heavily reliant.
Driving its strong revenue increases should be its BioShock Infinite and Grand Theft Auto V offerings. The company has a lot vested in GTA V especially, which is expected to account for some 50% of its fiscal year 2014 revenues. However, one of the positives, which could help bring revenue diversity in the future is Take-Two Interactive Software, Inc. (NASDAQ:TTWO)’s purchase of the rights to make “WWE” franchise games during the bankruptcy auction for defunct game publisher THQ earlier this year. This will help the company expand its sports lineup (beyond just its 2K lineup) and better compete with EA’s “Madden” and “FIFA” sports lines.