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Needham Downgrades Electronic Arts, Cites Valuation Concerns


In a report published Tuesday, Needham analyst Sean McGowan downgraded shares of Electronic Arts Inc. (NASDAQ: EA) to Hold from Buy with a $58 price target following a price increase of over 20 percent year-to-date, compared to a 1 percent gain for the S&P 500.

"We do not see weakness in Electronic Arts business, and, indeed, expect performance surprises are more likely to be positive than not, but we believe the current valuation captures the upside potential," McGowan wrote. "In our view, upside from current levels would need to combine both positive earnings surprises as well as multiple expansion, which, while not impossible, may not be reliable if the current console video game begins to show signs of maturing in fiscal 2018."

McGowan did note that the appreciation in shares "has been warranted" but further appreciate "may be more subdued." The analyst added that a discounted free cash flow analysis suggests a fair price of about $54 for the company.

McGowan further suggested that the March quarter will show a decline in both revenue and profits, due to a difficult comparison and the timing of certain game releases. On the other hand, the company is expected to issue guidance calling for strong growth in the June quarter and full year fiscal 2016.

McGowan concluded by stating that he will revisit his rating and price target after full year results are reported.

Shares of Electronic Arts recently traded at $54.58, down 3.7 percent.


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