Electronic Arts Guidance Should Ease Any Investor Concerns

MKM Partners said the FY17 EPS guidance of Electronic Arts Inc.

"will prove conservative" and should ease any investor concerns on the stock. The video game maker's fourth quarter earnings of $0.50 topped MKM/consensus view of $0.45/$0.42 and revenue of $924 million surpassed MKM's $900million and consensus' $889 million estimate. The quarterly results benefited from 18.3 percent digital growth, driven by increases in full game downloads, extra content (UltimateTeam) and mobile (Star Wars Galaxy of Heroes and Madden). The company guided EPS of $3.50 for FY17, while the Street estimates earnings of $3.57 a share. "[T]his forecast should prove conservative given a strong release slate, the potential for higher digital contributions and management's proven ability to manage its cost structure. Exceeding initial full year EPS guidance by an average of 30% over the last three years (including 14% outperformance in FY16) gives us added comfort," analyst Eric Handler wrote in a note. However, the analyst cut his FY17 EPS estimate to $3.58 from $3.60 to reflect 8 percent operating expense growth. But, Handler raised his FY17 revenue forecast to $4.95 billion from $4.90 billion, while the company guidance calls for sales of $4.90 billion. Street expects revenue of $4.92 billion. "Revenue should be paced by 14% digital growth and a modest 1% growth in physical sales. Digital should be fueled by extra content, mobile and full game downloads, which we project should grow 10%, 16% and 25%, respectively," Handler highlighted. Meanwhile, Ultimate Team, the key driver for extra content, grew 18 percent in FY16 to $692 million, and is expected to continue its double digit growth. The analyst noted that full game downloads should benefit from a deeper release slate along with continued market share gains. Handler has a Buy rating on the stock, with a price target of $84. According to TipRanks, Handler has a success rate of 70 percent with an average return per recommendation of +12.4 percent. The analyst is ranked 215 out of 3,913 analysts. At the time of writing, shares of Electronic Arts were up 0.91 percent to $74.05.