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Stock Analyst Update

Despite Some Negative Publicity, EA's Got Game

We're raising our fair value estimate on the narrow-moat game-maker due to better than expected leverage on its gross margin line.


 Electronic Arts (EA) reported an in line holiday quarter, as third-quarter revenue and EBITDA met consensus expectations despite the issues with Battlefront II. The firm sold over 7 million copies of Battlefront II in the quarter, falling short of management’s 8 million units goal, but a strong start for a game plagued by negative publicity around microtransactions. Management provided stronger-than-expected guidance for the final quarter of fiscal 2018. We are maintaining our narrow moat rating but are raising our fair value estimate to $103 from $95 due to better-than-expected leverage on the gross margin line and incorporating slightly lower tax rates. With the shares trading in 2-star territory, we would seek a wider margin of safety before investing in this high uncertainty name.

Net revenue of $1,160 million (up 1% year over year) was in line with guidance of $1,135 million. Total revenue from consoles grew 2% to $810 million, as the strong growth for the current consoles (up 8%) was partially offset by the ongoing decline for older consoles (down 62%). Mobile continues to expand for EA, with revenue up 12% year over year, as mobile sports games continue to gain traction. Digital sales continue to drive overall growth as the category increased to 64% of sales on a trailing 12-month basis versus 57% a year ago. Despite removing microtransactions from Battlefront II, live services revenue was up 27% on a trailing 12-month basis versus the third quarter of fiscal 2017 as Ultimate Team modes in both FIFA and Madden continue to grow in popularity.

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Neil Macker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.