It’s All About the Fundamentals
The answer is simple valuation, as ERTS shares have gotten to a level I never would have thought possible, no matter how weak the current operating environment. First let’s get grounded on what the equity value really is right now. EA has no debt and over $2 billion in cash & securities, versus a current market cap of $5.45 billion.
Looking over the balance sheet (per the 09/30/08 filings) I see shareholder equity of just over $4 billion, from which I’m happy to yank out all the goodwill and intangibles (totaling $1.4 b) to leave a tangible book of $2.6 billion, or roughly 50% of the entire capitalization.
That leaves just a $3 billion price tag on the entire company, which has a slew of titles that can be repackaged each year with minor tweaks. While operating losses make the whole business look like a wash, the losses are largely due to R&D costs that have ballooned by over $400 million in the past two years.
Also, as we look into calendar 2009, there is revenue sitting on the table & largely expensed already, including the next Harry Potter game (delayed along with the movie) and a Star Wars MMO title that will be the company’s first big foray into the online multiplayer space. EA has also committed tens of millions to online & mobile game distribution, which should drastically cut down on longer-term SG&A costs.
This person did not even mention Sims 3 which is guaranteed to sell millions plus millions of expansions.
all my criticisms about the company are for the long term. the fact that short term is lousy does not improve the long-term prospects, in fact, they hurt the long-term as well.
Management has proven its incompetence. They underestimated the Wii and have failed to beat competitors for the Xbox 360 and PS3. Gamers hate their PC games DRM, and their franchises are stale. Out of the several thousand of 'cheap' stocks out there, ERTS does not come close to being a better risk/reward proposition...not in the short or long-term. If i were buying a whole company in this economic environment, it certainly would not be ERTS.
You call *that* an analysis of the fundamentals? I'm not surprised, since you wouldn't recognize a proper valuation analysis if it hit you upside the head. I'll quickly point out some of the major flaws and rookie mistakesin the above so-called fundamental analysis:
1) *Everything* is 'cheap' right now on a 'valuation' basis--the analysis above does not compare ERTS to any other company, either in the vg industry or outside it. eg., look at it's PEG, at 1.46. You're pay way too much for whatever growth it's expected to have...and those expectations keep on getting lower and lower. By comparison, GME has a PEG of .55.
2) Management sucks ,has sucked, will continue to suck. They can't market their games right. They invest so much in a Mirror's Edge, which comes close to being good, and then totally flops. All critics and user-reviews say one thing about Mirror's Edge--rent it. The way to calculate management's stupidity in a valuation is to *lower* it.
3) ERTS has decreasing market share for PS3 and Xbox 360, which has been their focus. They have neglected the Wii...which is where much of the growth lies in the industry for the next year. Therefore, ERTS will continue to have decreasing market share, killing it's 'valuation'. Things are bad now, but they're getting worse.
4) Gamers are voting with their wallets---ERTS had only #1 top ten title in November. Just barely. Way to go guys!
but don't just believe me, here's what other analysts have to say--of course, I do my own analysis, but if w_c_o_m wants to pump a stock by cutting & pasting a cherry-picked analysts crappy work, then I'll go ahead and cut&paste analyst opinions as well in the next post.
Here's what the analysts *really* think about ERTS, and why. it's not pretty. w_c_o_m might want to not read this, and sure doesn't want you to have a fair and balanced picture of what will doom this stock.
Doug Creutz, Cowen: “The pre-announcement largely reflects poor performance by key EA titles due to quality issues.” Maintains Neutral rating.
Colin Sebastian, Lazard Capital: “The announcement confirms our channel checks that a number of EA’s key software releases are underperforming expectations.” He adds that industry trends “remain stable,” but that “the weaker consumer is contributing to growing disparity in product performance.” He sees continued strong sales of Nintendo hardware, Microsoft’s Xbox 360 and some software titles, including Call of Duty, Wrath of the Lich and Wii Fit. He keeps his Hold rating.
Brent Thill, Citigroup: Cut his rating to Hold from Buy; target to $21, from $31. He notes that economic conditions are driving retailers to be cautious on inventory levels. He sees a valid long-term turnaround story here, but says that “near-term macro conditions dominate and 2009 likely will remain tough.”
Eric Handler, Barclays Capital: Cut rating to Underweight from Overweight; target to $17, from $36. He says that a lack of top-10 titles is leading to disappointing financial results, and advises investors to stay away.
Daniel Ernst, Hudson Square Research: Cuts rating to Hold from Buy, and notes that EA’s current slate of games “failed to capture sufficient consumer interest.”
Robert Haley, Gabelli & Co.: Cuts rating to Sell from Buy. He notes that the company is feeling the effects of greater concentration of industry revenue in top 5 and top 10 titles. He says the company is basically admitting that its current strategy is flawed.
Michael Pachter, Wedbush Morgan: “Just when investors began to believe that things couldn’t get any worse, they did, and we believe that investors remain skeptical that management is on the right track.”
Evan Wilson, Pacific Crest: Maintains Sector Perform rating. He notes that EA this year release a range of titles, spending a fortune in the process and that none were breakout hits. “We continue to believe that EA’s actions exacerbate the negatives that the videogame industry as a whole is facing.”
Edward Williams, BMO Capital: Maintains Outperform rating. “As consumers battle the macroeconomic issues, the breadth of the strong performing games is not as significant as it has been during prior holiday periods leading to reduced retailer re-orders.”
Anthony Gikas, Piper Jaffray: Cuts rating to Neutral from Buy; target to $18, from $38. “We apologize for being wrong on the EA story and late to admit that this is a broken story,” he writes. “EA was on the wrong train (PS3) coming into this cycle, never right-sized R&D spending, and the huge success of the Nintendo Wii’s platform absolutely destroyed market opportunity for third party publishers like EA.” He says the growth phase of the game cycle is essentially over, and “EA is now faced with turning around the business in a flat to declining market during the next few years.”