Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Electronic Arts Inc. (EA): Let’s Play A Game

Page 1 of 2

Electronic Arts Inc. (NASDAQ:EA)Let’s play a game.

I’m going to tell you a story, and then it’s your job to identify what’s wrong with it.

On May 7, this past Tuesday, video-game maker Electronic Arts Inc. (NASDAQ:EA) reported earnings for its fiscal fourth quarter and full year ended March 31. Its revenue for the quarter was $1.209 billion, equating to a 11.6% decline compared with the same quarter last year. And for the year, its sales came in at $3.797 billion, or 8.4% less on a year-over-year basis. On the heels of this news, shares of the company ended the week higher by 27.2%, making it the top-performing stock on the S&P 500 .

According to Electronic Arts Inc. (NASDAQ:EA) Executive Chairman Larry Probst: “As we enter a new fiscal year, EA is well positioned for dynamic growth on next generation consoles, PCs, and mobile platforms. With world-class games, a rapidly growing digital business, and top-notch creative talent, we are excited about Electronic Arts Inc. (NASDAQ:EA)’s strategy for FY 2014 and beyond.”

So, to get back to our game, what (if anything) is wrong with this?

If you think there’s a disparity between its actual performance and the reaction of the market, then you’re not alone. How is it possible that a company that manufactures products to sell could be rewarded in the market for recording a double-digit decline in year-over-year quarterly revenue? That’s not a rhetorical question; I’m actually curious.

To be fair, Electronic Arts Inc. (NASDAQ:EA) did report growth in its bottom line. For the 12-month time period, it earned $0.31 in diluted earnings per share compared with $0.23 the preceding year. However, and this is an important point, all of the growth came in the previous three quarters, as its fourth-quarter diluted EPS was actually less by 13.2% on a year-over-year basis.

The catalyst for the move in its stock, in turn, clearly had nothing to do with its performance. The dramatic uptick was predicated rather on future expectations (that’s a nice way of saying “hopes and dreams”).

In the first case, the company raised its guidance for fiscal year 2014. It now expects to earn $1.20 in non-GAAP diluted EPS. That compares with an average analyst estimate of $1.08 per diluted share. And in the second case, the company announced a partnership with The Walt Disney Company (NYSE:DIS), under which Electronic Arts Inc. (NASDAQ:EA) now has the rights to create games based on the Star Wars franchise, though — and this, too, is a critical point — the financial terms of the deal have not been disclosed (use your imagination about who had the negotiating leverage here).

Page 1 of 2
Loading Comments...