EA shares took a hit today, falling around 3% to $17.75 on Thursday morning after one analyst drastically cut the price target on the stock from $28 to $22. Todd Mitchell with Brean Murray Carret & Co. pointed to problems with Star Wars: The Old Republic, according to MarketWatch, and he said there are "creeping concerns" about the title's performance.
Mitchell commented, "Specifically, initial sales appear to be below expectations, and casual observation of early play is causing us to rethink our churn assumptions." The game sold over a million units in its first week in late December, but there have been some problems with long wait times on servers and a minority of players experienced some glitches. Nevertheless, most analysts - unlike Mitchell - seem to believe the market is simply overreacting to the game, and it's too early still to make a proper judgment.
IndustryGamers' resident stock expert, Asif Khan, CEO of Panoptic Management Consultants, agrees that investors are impatient and that Electronic Arts is definitely a great buy for the long-term.
"We believe this [Star Wars news] has given investors a decent opportunity to enter into a long-term investment. Fundamentally, the stock is not incredibly undervalued as we do not see earnings growth meaningfully coming back to the company until calendar 2013 at the earliest. Technically shares look like they could fill the gap on the chart from 2/3/2011, dropping almost 15% to around $15/share. We believe traders and investors could do worse than buying the stock at current levels as even Mr. Mitchell's new target of $22/share indicates 27% upside from the current price," he noted.
Khan continued, "We would warn investors that EA will be spending more on R&D going forward as they prepare for the new console cycle, which would hurt their income and cash flow for a few quarters. Ultimately, next generation titles such as Battlefield and Madden will provide tremendous upside going forward. They are also executing a transition away from packaged goods towards digital distribution as well as social gaming that will ultimately helps margins. Tread lightly with this stock in the near term as Wall Street loves to beat up on video game companies, but patient investors could do a whole lot worse than initiating a long-term investment in EA at the current levels. It could be a volatile 2012 for the stock, but we are definitely closer to the trough for earnings than we are the peak."
For its part, EA can't really comment on sales as the company's in a quiet period before its next earnings call, but EA COO Peter Moore did note to IndustryGamers recently that he "couldn't be more happy" with Star Wars' reception. "We're only three weeks in since the launch and we're stable, we're robust and adding people. It was a ramped phase-up, and we made sure for the people as they came in that they had a great experience," he said.
We hope to have more reaction from EA BioWare in the near future.
