Electronic Arts: Buy or Sell
As the new generation of video games will finally take over this November with the release of Nintendo’s Wii and Sony’s PS3, should you, as an investor, be interested in purchasing shares of affected companies such as Electronic Arts (ERTS)? An answer to this question may unfortunately surprise you. Known for its Madden and Sims series, EA according to many investors and experts, is any excellent purchase for a long term investor. However, if you look more profoundly at the different indicators influencing this company, you will understand that, while there is potential for EA to produce in terms of a higher share price in the short run, in the long run I do not see too much optimism for fixed investors. Looking first at the fundamentals, EA has not been producing at a very favorable level. It’s true that three out of the last four earnings results have been surprising in a positive note relative to the bottom line, but on the other hand, in terms of margin growth in areas such as revenue, profit, and operating income, there is actually a loss from last year to this year. While many can argue that such loss is common to many companies, during times of growth, looking at the case of EA, such a sentiment should not be the case. During times of economic expansion and high growth, companies such as video game producers should be generating at extraordinary levels. I say this because, throughout this time period, many consumers have found not only jobs, but jobs with high levels of income to represent the growing ambitions companies have. When such is the case, there is a shift in demand for normal goods to more luxury goods as consumers are now able, especially with a negative spending rate, to consume more at higher levels. As this occurs, a company like EA should be the beneficiary of such a favorable economic setting and take distinct advantage in terms of profit. However, as this is not the case for Electronic Arts, such pessimism only adds another negative aspect into the purchase of shares for this company. In response to this argument, another counterargument may be made with respect to the release of Nintendo’s and Sony’s new consoles. As these amazing graphic producers will be released, it should be obvious that there should be more of a chance for the fundamentals to grow. While such is a valid statement, if you look at how EA preformed when the previous generation of video games were released, you may encounter a different opinion. After Microsoft’s Xbox and Nintendo’s Gamecube released in November of 2001, one year to that month EA was only standing with a share price only 40% higher. While you may call that a pretty good year in terms of higher capital gains, I believe much of that growth can be attributed to continuing momentum from previous years and less about the actual release of the system, as other competitors in the video game industry such as Activision, THQ, and Konami all reported negative growth in terms of share price for that same time period. In addition to that, during a time of affluence in the United States and most of the world such as Japan, where video games are immensely popular, EA only reported a share price growth of negative 10% in 2005, and so far in 2006 has only broke even. Also, another idea to keep in mind is that EA’s share price actually dropped close to 15% since Microsoft’s release of Xbox 360 last year which should have actually produced a tremendous gain for the Madden giant. Thus, when examining the data in terms of fundamentals and current trends for Electronic Arts, while there may be some potential this year to grow relative to the release of the Wii and PS3, do not expect such share price growth to sustain for long. It is hard to argue against such a company which has produced video games recognizable to almost everyone, video game player or not, but with poor fundamentals, which is probably related to poor management, I do not like EA’s long term potential to accumulate much capital gains for its investors. Dennis Biray presents advice on all kinds of topics ranging from finance and investing to fitness to sports. For more information email him at dbiray@gmail.com, or to view other articles written by him visit www.biraynetworks.co.nr |
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