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Electronic Arts Inc. (ERTS) Message Board

  • trader_brad trader_brad Oct 11, 2011 10:51 AM Flag

    for those excited about SWTOR...

    A good company does not make a good stock. A company could be doing well and the management make all the right moves, but the stock could be significantly overpriced because expectations get out of whack.

    ERTS just had their first quarter's worth of earnings in a long time. They do not consistently produce earnings.

    SWTOR will likely be a commercial success, but it is unknown how much of those revenues will have to be shared with Lucas Arts per terms of the licensing agreement. Is it 33% of the monthly fee? 25%? 20%? What portion of the boxed sale goes to Lucas Arts?

    I'm very confident that SWTOR will be a success, regardless of whether it supplants WOW. People really enjoy playing the beta and not only are pre-orders strong, but they have been accelerating (no doubt due to the announcement of a release date). Pre-announcement, they were adding 20k per week. Post-they added 40k the first week and 60k the most recent week.

    but... ERTS is still carrying $1 Billion of Goodwill on their balance sheet (mostly from the acquisitions of Bioware & others). For those unfamiliar with "goodwill" it is an asset that is not real or intangible. It is a way for companies to put a value on research and upcoming products.

    so... once SWTOR comes out, ERTS should write down the value of this intangible asset because the product is becoming real or coming to market. If I remember right, they bought Bioware for around $500 Million. Let's say they sell 3 million SWTOR copies at launch ($150 Million) and are able to retain 1 million subscribers ($180 Million per year), BUT they have to share a third of this revenue with Lucas Arts, so $100M up front & $120M recurring...

    *** this is a drop in the bucket for ERTS compared to their annual revenues of $3.77 Billion per year. Let's say you are wildly optimistic and think they will have 2 million subscribers for SWTOR, that's still only $240M compared to $3.77B which isn't even 10% of their revenues.

    Don't buy ERTS because of SWTOR, the vast majority of their revenues (93%) will be coming from other sources (Sports, Social, Shooters, etc)

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    • I don't own any GICs, thanks. I don't believe in the G of GICs since you are essentially loaning your money to an insurance company so they can invest your money in risky investments and turn around and "guarantee" you a return of your money. The guarantee is only good if they do not go bankrupt.

      I have out-performed while mostly using mutual funds (and paying those fees), so to each their own. Everyone has their own system. Most systems don't work, but some do.

      I'm long-term focused since I am managing people's life savings. I am open as an investor to short-term opportunities (for example, I made 17% in TTWO in two days because the original Bioshock was an unknown in the analyst community and reviews came out on the Thursday before the release date Tuesday), but yeah I don't play the short-term indicators and have not played the $20 to $24 range.

      I'm mostly long-only, and playing momentum is not a good risk/return tradeoff since you have to pull the plug routinely before everyone else does, so I don't play momentum. I take an owner's view of the business so I don't give any weight to things that can be claimed accounting-wise but don't have any benefit to an owner. So that's where I differ with some/most of you, and we are similar in that we are all passionate about investing.

    • Yikes! Each to his own I guess. My only advice to you is stick with blue chip investing in DOW components, because IMO you have absolutely no idea about EA (momentum or range trading, turnarounds, rebranding, or Dale's famous "breakout indicators") and how it acts as a stock. I would definitely say there is MASSIVE risk for you here and since there are so many ponies to ride, for your family's sake, pick another that isn't as volatile as ERTS. You are thinking and sounding like a CFA, not a 'trader_brad'. Stick with the GIC's and mutual funds.

      Either that or follow your mouth, put your money where you mouth is and short this stock like crazy anywhere from $22.50 and up. I was expecting a pull back two days ago after it's huge one day run up from profit takers to double my position but didn't get it. Almost broke $24 today. Looks like people are trying to load up for earnings but not many are selling from the volume numbers today and yesterday. Good luck to you, I hope you heed my advice. Only chance you have at success here is a European Default and well, you can make more money shorting other stocks than EA based on that strategy (see: Marlin Tourney).

    • The revenue recognition stuff is overly complex and doesn't help with investment decision making (IMO)

      I think if ERTS can consistently have earnings of $1.5 per share, it is a $22.50 stock in this environment. If it can consistently make $2.4 per share, it is a $36 stock. This company hasn't had consistent earnings in a while. If we weren't in the current environment of banking problems and recession possibilities, this could be a $40+ stock if they have consistent earnings (very far-fetched over short term). Or they could continue to fluctuate between profits and losses and it could be a $10 stock.

    • It started to sound like some analysts were getting on board recently, but one came out neutral with some concerns, but I forget what they were at the moment. I think it could hit 25, or close to it, challenging it's 52 week high, rolling into earnings if the world doesn't end like it tends to do every other day lately.

      As an option trader I only need about 23.50 for a double and the rest is icing on the cake if I ride it out.

    • Homersby, I appreciate your frankness. All your points taken, what are you looking for as a pps, into earnings? (assuming no major global issues) Thanks, dales53

    • I too am a short term trader that do this for a living but I have to admit that I do get excited about making lots of money on a stock that I make confident buying and selling decisions about. There is a lot of technical analysis going on on this board, Feb - June it was pumpy and during the debt crisis and credit rating change but I wouldn't consider it that now. I believe the time that everyone has be waiting for is upon us. The forecast that is coming with the earnings report should prove very positive upside for PPS.

      That said there is ALWAYS the possibility of a macro economic situation occurring that will kill all stocks in the short term and erase the steady gains that ERTS has enjoyed in the build up to earnings. I wish it were tomorrow or next week. I don't like tying up my money waiting for two weeks but ERTS is showing a pretty solid floor here at 22.85 - 23.50. The risk that I see here is an unstable US/Global economy with the NASDAQ at 2617. Two weeks is a allows a lot of time for a very ill timed market correction.

    • I have my CPA and appreciate all of your ideas but neither agree or disagree with them as a trader. Longer term your points are pretty strong, but I am here to trade short term news, game releases and related hype. Personally I do not care for ERTS in general, but I can put my emotions aside if I think I can make money, whether long or short.

      Trade with my head not with my heart.

    • Brad,, what do u think?

      Are the EA going down to 20 or will it go up to 30?

      Down to 15 or up to 30?

    • A) congrats on your CFA. that is no easy test. but the time you spent on that test I spent combing through all of ERTS's 10Ks and 10Qs and getting to know the company inside out

      B) they're on a runrate to do $4.0bn this year FY12, and potentially over $4.4bn in FY13

      C) i agree this is an asset-light business; it's a software/digital media company...

      D) if you are killing brain cells over P/E ratios, that metric will throw you off. GAAP vs. non-GAAP recognition only misleading. focus on operating margins, ebitda, free cash flow etc - they're improving drastically over FY09 FY10 FY11

      E) you can't look at 17x P/E - the forward EPS is clearly wrong. ERTS could do $1.50 for FY2013

      F) don't compare apple with erts - if you buy AAPL at $400 you own it at a mere 4.5% free cash flow yield. what's your downside if things slow down or they miss a product cycle? it's a very very crowded long.

      G) ERTS isn't a great company, it's a so-so company that has some cool products, and they happen to be improving sales/margins at a rate the market hasn't fully discounted yet.

      H) I'm serious about the CFA comment. it's not an easy test, but that won't make you a smart investor. focus on understanding what's changing AT THE MARGIN. FYI, ERTS is up 44% YTD - that's better than almost all global equity markets. WHY??

    • I am a CFA charterholder and I find ERTS hard to value. So, to me that indicates it is risky and potentially overvalued.

      For example, what is an honest and realistic level for their annual earnings? Restated, what is their long-term earnings power?

      A real simple comparison to get to a relative valuation would be to adjust the forward p/e by the balance sheet strength. Their current assets are $1B greater than their current liabilities. So... forward p/e times (market cap minus $1b) divided by market cap. = 19.6 * 6.76 / 7.76 = 17 adjusted forward p/e. This is in comparison to a market that is trading at 13 forward p/e, and a handful of mega cap tech stocks trading at lower than 9 adjusted forward p/e.

      For a company that hasn't proven that they can consistently make money, having a rich multiple (which is richer than Apple's!) increases the risk and lowers the return/risk prospects.

      Apple's adjusted forward p/e is 12.21 * 350 / 370 = 11.51 and they've shown they can be highly profitable. (or you can look at Intel or Microsoft).

      Great company does not equal great stock.

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