August 4, 2008

Growth is Coming to Electronic Arts

Shares of Electronic Arts (ERTS) have hit a new 52 week low this week, and are sitting just above historical two and five year lows. While this may prove to be frustrating for current EA stockholders, it will serve as an excellent entry point for new ones.

First Quarter Results: While rivals Activision and Take-Two Interactive have reported stellar earnings, EA has reported a first quarter loss of $95 million. This will be the fourth year in a row that EA has reported a net loss in the first quarter. Analysts were expecting revenue of $640 million, but EA earned $609 million.

MMO: More Money Online: The key to future growth for the company will be in the Massively Multiplayer Online (MMO) market. A MMO video game is one that requires players to pay a monthly fee after the initial purchase of the game in order to continue playing. The largest MMO game is World of Warcraft which has an estimated 11 million subscribers.

EA is set to enter the MMO market with not one game, but two. The first game, Warhammer Online is set to be released in the fourth quarter of 2008. While there is no guarantee that the game will be as successful as other MMO games, there has been a good amount of hype generated for the game. Even if EA can retain a few million recurring subscribers to the game, this will help contribute to their earnings.

However, EA may climb to the top of the MMO game market with the acquisition of VG Holdings, the parent company of game developer BioWare and Pandemic Studios. Although no official press released has been made, BioWare is developing a MMO based in the Star Wars universe that is based on the Knights of the Old Republic video game series. A video game that has requires a monthly fee to play on top of a initial $50 investment plus any future expansion packs based on an intellectual property as popular as Star Wars will generate hundreds of millions of dollars in revenue by itself.

Additional Growth Drivers: The Bioware purchase also gives EA the rights to publish other Bioware titles such as future installments of the Mass Effect series, which has sold close to 2 million copies for the XBOX 360. Bioware has also announced a role playing game called Dragon Age that does not have a release date yet.

On September 7, EA will release Spore a new "creature" based simulation game from Will Wright, the creator of Sim City and The Sims. A demo of the creature creator was sold for $10 at the end of June, and was the best selling PC game for the week ending June 21.

What To Do: With shares at historic lows and great products in store that will drive earnings growth, buy shares of Electronic Arts. Some patience may be required until its full arsenal of games are released, but based on future potential, EA looks cheap.

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