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Is It Time To Hit Restart On EA's Stock After Tough Quarter? The Street Debates What's Next

Is It Time To Hit Restart On EA's Stock After Tough Quarter? The Street Debates What's Next

Video game maker Electronic Arts Inc. (NASDAQ: EA) reported Tuesday afternoon with fiscal third-quarter results that CEO Andrew Wilson acknowledged "did not perform to our expectations."

Here's how the Street's analysts reacted to the quarterly print and guidance.

The Analysts

Bank of America Merrill Lynch's Justin Post maintains a Neutral rating on Electronic Arts with a price target lowered from $113 to $95.

Morgan Stanley's Brian Nowak maintains at Equal-weight, price target lowered from $100 to $80.

The Buckingham Research Group's Matthew Harrigan maintains at Buy, price target lowered from $120 to $90.

MKM Partners' Eric Handler maintains at Buy, price target lowered from $112 to $92.

Bank Of America: Rough Year

EA's revenue miss in the December-ending quarter can be attributed to poor performance in "Battlefield" and within mobile and subscription revenue, Post said in a research report. The company is seeing a difficult fiscal 2019 so far due to heavy competition, but this theme is unlikely to play out next year, the analyst said.

Although management's early commentary on fiscal 2020 implies a single-digit growth rate for bookings and profit, this appears to be conservative, with upside potential coming from "Star Wars," "Titanfall" and the ramp of live services, according to BofA. 

Morgan Stanley: EA Has Mid-Tier Problem

EA attributed its poor performance to "unprecedented" competition in the video game space, Nowak said in a research report. The problem for EA: its portfolio of games mostly fall in the mid-tier category, which isn't the right strategy, the analyst said. 

"There are no more 'B' titles ... gaming is now a world of 'As' and 'Ds.'" 

The company plans on increasing its focus on game development instead of dedicating resources to non-gaming activities like streaming products and subscriptions, Nowak said. This new strategy could take time to play out and presents near-term execution risk, he said. 

Related Link: Electronic Arts' Q2: The Sell-Side's Take

Buckingham: Superior Model

Despite EA's "disappointing" performance in the quarter coupled with "even worse" early fiscal 2020 guidance, the bullish case for the stock can still be made, Harrigan said in a research report. The company still boasts a superior subscription and cloud gaming platform through EA Sports, while occasional media chatter of the company being an acquisition target offers some downside support for the stock, the analyst said. 

MKM: Easy Bar To Clear

EA's revenue miss, downward revision to its full-year guidance and poor outlook to fiscal 2020 implies the "pendulum is swinging the wrong way," Handler said in a research report.

On the positive side, management's fiscal 2020 EPS guide below $4 per share — versus expectations for EPS above $5 — suggests its guidance is "overly cautious," especially when considering a strong release slate of games, the analyst said. 

EA's commentary of no margin improvement seems a "bit severe," as gross margins could improve by at least 200 basis points as digital contributions rise — and operating expenses are likely to grow by less than 2 percent, Handler said. 

Price Action

Electronic Arts shares were trading lower by 13.38 percent at $80.14 at the time of publication Wednesday.

Of particular note, rival gaming company Take-Two Interactive Software, Inc (NASDAQ: TTWO) reported disappointing earnings Wednesday morning, sending the stock lower by 10.46 percent.

Related Link: Electronic Arts May Have Lost Its Creative Way, Jefferies Says In Downgrade

"Anthem" screenshot courtesy of Electronic Arts. 

Latest Ratings for EA

Nov 2019MaintainsBuy
Oct 2019MaintainsBuy
Oct 2019MaintainsOutperform

View More Analyst Ratings for EA
View the Latest Analyst Ratings

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