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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 think SWTOR could be huge for EA, but I'm an investor in EA because I think they're not solely focused on one area of gaming. They're #2 in Social/Facebook gaming, #1 in iOS gaming, and #2 in console gaming. They have very strong IP and have made big strides in social and mobile gaming. I believe they'll eventually become the #1 video game company in social, mobile and traditional console gaming. While Star Wars is looking to be a big hit for them, it's just one piece of the puzzle. Granted if SWTOR shatters expectations with huge subscriber numbers that'll directly affect the earnings and stock price. However, even if it doesn't I think EA is the best positioned video game company out there at this time.

      • 1 Reply to chillaxdaily
      • correct... listen

        the nay-sayers are ridiculous

        what part of 'best-ever pre-sales orders' do they not understand

        they're already break-even on this title, i think they've easily sold 1.0m units globally

        do you realize how crazy Star Wars fans about this stuff? there isn't a major movie release soon

        so they're going to plug into this game, it'll help the MMO genre

        and from what i gather WoW is slowing down. those guys need the next fix.

        why can't we assume 20% of WoW players will take interest in Star Wars?

        that alone gets you over 2.0m subs - add in all the star wars fanatics and new players

        easily can get to 5.0m subs by January 2013

    • First of all, probably simply a typo on your part, but you said goodwill is not real or intangible. It is actually NOT tangible, therefore it is intangible.

      Second of all it is in no way a means for a company to put value on research and upcoming products. It is instead the value over and above the tangible value of the acquisition they make to acquire someone like Bioware.

      Finally, they would not ever write it down or off as long as the acquisition continues to deliver some level of return to them. Auditors revew this regularly under FAS 142 audits to ensure that the goodwill is still supported, otherwise they would require a write down or write off.

    • 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.

    • 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.

    • 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).

    • 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?

    • 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.

    • 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 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.

    • Yeah,, ho cares if this will be the WOW-KILLER or not.. Hmmm...

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