Analyst: Electronic Arts Has Lineup to Deliver Revenue

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

Last week, Electronic Arts (NASDAQ:EA) delayed the release of the Xbox 360 SKU of Titanfall a second time. In an EA blog post last Wednesday, Patrick Söderlund, EVP, EA Studios, announced that the release of the Xbox 360 SKU of Titanfall had been delayed to April 8 (in Q1:15) from March 25 (in Q4:14) in North America, and to April 11 from March 28 in Europe to give developer Bluepoint Games additional time for polish.

The latest delay had no impact on guidance. In a separate 8-K filing, EA announced that the delay did not affect its Q4:14 or FY:14 guidance. Q4:14 guidance is for revenue of $800 million and EPS of 9 cents, while FY:14 guidance is for revenue of $3.91 billion and EPS of $1.30.

The shift of Titanfall on the Xbox 360 gives us great confidence in EA’s ability to deliver upside to Q1 results, and limits execution risk in FY:15. We believe the delay means that EA will deliver significant upside to our current estimates, which are Street-high for Q1; we also believe that Q1 EPS upside to consensus estimates is likely, and will cause many investors to view execution risk as minimal.

Adjusting our estimates to reflect the Titanfall Xbox 360 SKU delay. We are increasing our Q1:15 estimates for revenue to $800 million from $660 million and for EPS to break even from 13 cents.

We are lowering our Q2:15 estimates to offset the Q1:15 increases, and our FY:15 estimates remain at $4.31 billion for revenue and $1.65 for EPS. However, our bias is that FY:15 results could significantly exceed our current estimates. We will not adjust our FY:15 estimates until the company provides greater granularity into its long-term release slate.

We believe the Titanfall delays reflect revenue management and an effort to maximize next-gen console sales, as opposed to any quality issues. We view the game as the first must-have for the Xbox One and believe that it is in the best interests of Microsoft and EA (near- and long-term) to maximize next-gen console sales, particularly with the industry’s current-gen sales below expectations recently.

We believe that EA has the lineup to deliver revenue and EPS growth for at least the next two years. We believe that EA can grow revenues by $400 million per year and deliver 50 cents or more in EPS growth for the next two years.

Maintaining our OUTPERFORM rating and increasing our 12-month price target to $37 from $30. Our PT is based upon a forward P/E of 20x our FY:15 EPS estimate plus $4 in net cash, in line with the company’s historical multiple.

Michael Pachter is an analyst at Wedbush Securities.

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