Game maker Electronic Arts (EA) is bouncing back on investor optimism after plummeting in late January and early February following tepid forward guidance that overshadowed strong quarterly results.
EA predicted on Jan. 28 that fiscal-fourth-quarter earnings would come in around $0.40 a share on some $875 million of revenues -- disappointing Wall Street, which was looking for $0.52 EPS and $917 million in quarterly sales. The stock tumbled on the news, falling to as low as $53.01 intraday on Feb. 8 after closing at $69.79 on Jan. 28 prior to the guidance's release.
Shares swooned even though the firm had actually reported better-than-expected fiscal-third-quarter results. On a non-GAAP basis, the company earned $1.83 per share as revenues rose 26.3% to $1.803 billion. Gross margins totaled 70.4%, while EA recorded a 42% non-GAAP operating margin. Operating cash flow also jumped 30% to $889 million.
The strong results stemmed from EA's recently launched Star Wars: Battlefront video game, whose sales surpassed management's previous guidance of 13 million units.
All told, EA's game revenue from consoles soared 24% to $463 million. And although PC-gaming revenues only added 1%, one of the company's fastest-growing revenue sources comes from mobile phones. Game-playing on smart phones helped EA boost third-quarter revenues by 17% of $162 million.
Another interesting part of EA's business is extra content. Gamers are willing to fork over extra micropayments to unlock special features in EA's games. Extra-content revenue grew 15% to reach $360 million in the latest quarter, as well as to $1.057 billion for the fiscal year's first nine months.
How to Play EA
For the full year, analysts' consensus estimates call for Electronic Arts' revenue to rise 5% to $4.5 billion, generating $3.11 in EPS.
And despite management's below-consensus guidance for the current quarter, investors are optimistic that results could come in better than expected. Planned releases for the current quarter include Plants for Zombies: Garden Warfare 2, UFC2 and Unravel, and EA shares have clawed their way back to around $64.
Analysts have also begun to look ahead to the company's next fiscal year, forecasting revenues to rise 7.4% to $4.8 billion. Those who follow the stock are assuming digital revenue will grow faster than console revenue, driving margin expansion.
All told, analysts expect EA to end its current fiscal year with 71.6% gross margins and better than 73% gross margins next year, which will drop right down to the bottom line.
If you apply a mid-range multiple of 23x to the stock and assume Electronic Arts can ring up around $3.50 in EPS next year, that means EA is probably worth around $80 a share. That's some 25% above current prices.