Choose Your Player: Analysts Consider Video Game Sector Quarter Results
Earnings from the video game sector continue to fill newsfeeds.
Electronic Arts, Inc. On January 28, Electronic Arts, Inc.(NASDAQ: EA) reported third quarter results ending December 31, 2013. “Shares fell” over 5 percent following the press release and continued to take a hit in after-hours trading. Electronic Arts reported third quarter EPS of $1.26 versus the Streets estimate of $1.23, up 121 percent quarter-over-quarter. Revenue missed the Street's estimate of $820 million at $808 million. Sales were also down 32 percent year-over-year. The company lowered FY14 revenue guidance to $3.91 billion versus the Street's estimate of $4.03 billion. Shares of Electronic Arts have rebounded since Tuesday, but have taken another hit on Monday, down as much as 3.2%.
Following results, Bank of America Merrill Lynch upgraded Electronic Arts from Neutral to Buy with a $36.00 price target on three main points. Bank of America noted “1) while the console transition impact remains a N.T. risk, next- gen console sales will drive optimism on CY15 industry growth, 2) Titanfall (March) has a good release window and could be a near-term catalyst, and 3) EA's leaner cost base has the company on track for strong EPS and CF growth even with a soft top-line.”
Brean Capital analyst Todd Mitchell reiterated a Buy rating and $32.00 price target on Electronic Arts on January 29. The analyst wrote, “These results highlight EA's initiatives to boost its operating margin to 20% over the next few years, which we believe has the potential to generate industry leading EPS growth and multiple expansion for the company. A key component of this story remains ongoing growth in digital revenue, which increased 27% in F3Q14 to $517 million. We anticipate significant growth in digital through F2015 driven by continued sales of Battlefield 4, FIFA 14, and the launch of Titanfall, scheduled for March 11, and its accompanying, albeit as yet unannounced digital add-ons.”
Take-Two Interactive Software, Inc. Take-Two Interactive Software, Inc. (NASDAQ: TTWO) will report third quarter results on February 3 after the close. Take-Two expects 3Q earnings of $1.37 per share on revenue of $704.44 million.
Management reported a beat in estimates, with 3Q EPS of $1.70 and revenue coming in at $767.70 million. Take-Two expects fourth quarter EPS to fall within $0.00-$0.10 versus $0.13 estimate. Management forecasts sales of $170- $200 million versus $215.60 million estimate. FY2014 EPS guidance was raised from $3.50-$3.75 to $4.15-$4.25. Sales outlook for FY14 also increased from $2.20-$2.30 billion to $2.35-$2.38 billion.
Todd Mitchell published a report prior to results. He noted a potential upside to F3Q14 guidance for revenue of $640 - $700 million and non-GAAP EPS of $1.20-$1.35 due to higher than expected sales of GTA V. Mitchell added that it is believed that the company is working on a bridge to GTA Online for the next gen consoles with PS4 as the first. Brean estimates that Take-two exit the third quarter with as much as $10-$12 per share in net cash.
Brean reported that Take-Two is fully valued given “the outperformance of GTA V and that fiscal 2014 non-GAAP EPS and FCF is impressive. However, the company's ability to manage its pipeline to profitability is spotty and the lack of color regarding the potential profitability of GTA Online or its next gen or digital strategy in general for the franchise leaves us wanting. Given the information provided thus far, and the amount of deferred revenue the company will be running through its GAAP P&L, we cannot get to “normalized” non-GAAP EPS much north of $1.20-to-$1.30, and more importantly, we do not see FCF rising above sub-par levels for many years. As a result, we have difficulty seeing the potential upside to TTWO from current levels.”
Activision Blizzard, Inc. On February 6, Activision Blizzard, Inc. (NASDAQ: ATVI) will report fourth quarter 2013 results after the market closes. Fourth quarter EPS is expected to come in at $0.73 and revenue is expected to hit $2.22 billion.
In a preview, Todd Mitchell commented that “Results will be driven by more upside for Skylanders and the launch of Destiny in September, a science fiction based open-world FPS with a strong community element, which could drive the stock higher on its own, but not a significant bottom line contribution for the first year.” The analyst added that management minimized risk in 2014 by expecting a greater contribution from Blizzard and its PC titles. Brean forecasts a 9% increase in revenue to $4.7 billion and non-GAAP EPS of $1.30 versus consensus of $4.66 billion and $1.27, respectively. Mitchell reiterated a Buy rating and $20.00 price target on Activision.
GameStop Corp. GameStop Corp. (NYSE: GME) will report results at the end of March. GameStop lowered guidance on January 14. The company lowered Q4 EPS guidance from $1.97-$2.14 to $1.85-$1.95 versus the estimate of $2.14. GameStop also lowered FY2013 EPS guidance from $3.08-$3.25 to $2.96-$3.06 versus $3.25 estimate.
Following the company's announcement, Bank of America Merril Lynch analyst Curtis Nagle maintained a neutral rating on GameStop noting the strong sales of the next gen consoles. Nagle remarked on a few concerns regarding near-term headwinds for GameStop including, “1) Uncertainty over whether aggressive discounting of next gen software by AMZN & WMT will continue; 2) modest next gen software tie-in ratios; and 3) sentiment risk over the threat of digital gaming to GME.”
S&P Capital IQ expects FY15 (January) revenues to increase 8.1% from $9.1 billion to $9.8 billion. This forecast reflects growth in new video game hardware sales and follows the expectation of new console launches to drive increased trade-in activity and growth. The analyst expects $475 million in free cash flow in FY15 with a FY15 EPS of $3.95, or a 29% increase from FY14. S&P wrote, “We see GME and the industry experiencing strong acceleration in growth trends over the next few years from late 2013 new hardware offerings. We view positively GME's strategy to diversify into new revenue streams such as digital content and new/used mobile device sales and think concerns over the obsolescence of physical media are overblown. We also expect share repurchases to contribute meaningfully to EPS growth.”
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