Electronic Arts Inc. (EA): This Gaming Company Is in Deep Trouble

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Electronic Arts Inc. (NASDAQ:EA) has been named the “Worst Company in America” for the second year in a row by Consumerist, a popular consumer affairs blog. Electronic Arts Inc. (NASDAQ:EA) is a leading player in digital interactive entertainment. It develops gaming software content for video games, computers, mobile phones, etc. Its leading brand, EA Sports, offers various sports-based video games like FIFA, Cricket, etc.

Electronic Arts Inc. (NASDAQ:EA) is really struggling. The stock is almost 26% down from the high level of $24 it achieved in November 2011. The latest games coming from EA’s stable have failed to attract customers. Many customers have complained of the problem of servers going down while playing the games.

Recently, the CEO of Electronic Arts Inc. (NASDAQ:EA), John Riccitiello, stepped down. The company has laid off an undisclosed number of employees from its Montreal-based mobile studio. Clearly, not everything is right with Electronic Arts.

Issues with EA

In recent times, Electronic Arts Inc. (NASDAQ:EA) has failed to provide games and products which are well received by consumers. Games like Dragon Age 2 and Mass Effect 3 have been rejected and criticized by game lovers, the exception being Dead Space 3, which was the number one game in February 2013.

The most disturbing has been the SimCity Debacle. The release of SimCity 5 met with angry reactions of gamers as it required them to be always online. The requirement of being online always resulted in heavy traffic and the jamming of servers. Some customers even claimed that the online requirement is a trick of Electronic Arts to encourage in-game store sales.

Electronic Arts has been accused of not supporting its products properly, as seen in the debacle of SimCity. Many games are facing the issue of bad support.

Moreover, the gaming industry, as a whole, is facing trouble. There has been a collapse in the revenues of the video game industry. The sales of gaming consoles are low. According to an NPD report, in the month of February 2013, the sales of physical video games, hardware, and accessories in the U.S. fell 25% to $810 million. Hardware sales dropped 36% and software sales dropped 27%. The rise of digital games has affected the sales of physical games.

Larry Probst has been appointed as executive chairman as the company searches for a new CEO. He has been a board member and former CEO of the company. Riccitiello has held himself accountable for the shortcomings in the 2012 financial results of EA.

Financials

Net revenue for the quarter ending December 2012 was $922 million, down 13% from the year ago period . The revenue for the quarter was majorly driven by FIFA 2013, Madden 2013, and Medal of Honor: Warfighter. Electronic Arts posted a net loss of $45 million in the quarter. The diluted loss per share for the quarter ending Dec. 31, 2012 was $0.15.

Source: EA Quarterly Report Dec 2012

Stock analysis

EA’s stock is currently, trading at a low level of $17. The stock is almost 26% down from the high level of $24, it achieved in November 2011. The dismal performance of the stock can be seen in the chart below.

Source: CNBC

There has been considerable decrease in the market valuation of EA, which has reduced more than 40% since January 2012.

The competitors of EA include , , Nintendo, Ubisoft Entertainment, etc. Electronic Arts is smaller as compared to Activision Blizzard, Inc. (NASDAQ:ATVI), which leads the industry with a market capitalization of $16.1 billion. The five year EPS growth forecast for EA is (0.02)%.

The operating margin of EA also lags behind competitors. A positive thing is its lower PEG ratio. Electronic Arts’ 5 year expected PEG ratio of 1.37 is better than that of Activision Blizzard’s 2.13.

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