Electronic Arts: Deep Stock Analysis of NBA Live Cancelation

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

On Thursday, Andrew Wilson, the EVP of EA (NASDAQ:EA) Sports, announced the cancellation of NBA Live 13, previously scheduled for release in Q3:13, due to the company’s inability to develop a high-quality game in time for the beginning of the NBA season. EA  delayed NBA Elite 11 two years ago for the same reason before ultimately cancelling it. The last iteration in the NBA Live series was released in 2009 and sold under 1 million units.  With the delay, EA has effectively ceded an exclusive to the genre to Take-Two for the fourth year.

Lowering our FY:13 estimates to reflect the cancellation and lower contribution from the Star Wars MMO.  For FY:13, we now  expect revenue of $4.16 billion and EPS of $1.15, compared to our prior estimates of $4.25 billion and $1.20, consensus of $4.16 billion and $1.06, and guidance of $4.10 – 4.25 billion and $1.05 – 1.20.

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Maintaining our FY:14 estimates, which reflect a mix shift towards packaged goods sales. We expect revenue of $4.75 billion and EPS of $1.58, well above consensus for $4.44 billion and $1.24. FY:14 sales will benefit from NBA Live 14, Battlefield 4, likely a stronger seller than this year’s Medal of Honor game, Dragon Age III,  Fuse (formerly  Overstrike) spillover,  UFC, and potentially a game from Respawn. In addition, we expect digital growth to continue (we estimate ≈ $350 million) despite lower expectations for Star Wars (better expectations for free-toplay, but worse for subscription). Our FY:14 EPS estimates may have upside, and we will revisit them once we learn specific release dates.

EA should meet or exceed the high end of its Q2:13guidance (revenue of $1.05 – 1.10 billion and EPS of $0.07 – 0.12) due to solid sales of its sports titles and digital growth.  FIFA, Madden, and NHL are all expected to show growth.

The cancellation of NBA Live 13 is expected to benefit sales of Take-Two’s NBA 2K13, to be released on October 2.

Maintaining our OUTPERFORM rating and our 12-month price target of $29, which reflects a multiple of 16x our FY:14 EPS estimate of $1.58/share, plus an estimated $4/share in net cash.  Our multiple is near the low end of EA’s historical range to reflect uncertain industry growth. Electronic Arts shares are on the Wedbush Securities Investment Committee’s Best Ideas List.

Michael Pachter is an analyst at Wedbush Securities.

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