- We believe declines on
concerns over Star Wars and NPD data are overdone.
- The Bottom Line –
At yesterday’s close of $17.54, EA’s stock is now down 30% since hitting
its 52-week high on Nov 4. Much of the weakness is related to concerns around
Star Wars: The Old Republic and, to a lesser extent, recent weakness in NPD
data. While there is much uncertainty around Star Wars, we continue to believe
that initial sales will be decent and that it could achieve our initial sell-in
target of 1.5mm (longer-term sustainability of subscribers remains unclear but
won’t be known for some time). In our view, the stock will reflect something of
a binary outcome in the near term based almost solely on Star Wars launch sales
(which we expect when EA reports 4Q earnings in the next few weeks). At the
current levels, if the initial sell through comes close to our target, we would
expect at least a 10%-15% bounce in the stock. We believe much of the
speculation about SW is the result of a few key reasons:
that since the company hasn’t addressed sales since just after launch, that
numbers must be bad – EA has only said that it is in its quiet period and,
thus, not commenting.
third-party analysis of the game’s server loads – Without knowledge of how
EA is allocating its server capacity, it is difficult to make accurate
estimates of the number of users based on third-party analysis of server loads.
3) Game mechanic
problems and patches – While such game-play related issues could certainly
impact the long-term sustainability of subscribers, we don’t think it has much
of an impact on backward looking initial launch sales figures. Our contention
is that the stock could bounce in the near term based on initial sell-in.
Accordingly, these game-play issues will be more of a concern for future
estimates, not initial sell-in.
4) Weak NPD –
Finally, while retail sales of the title are tracked by NPD, we expect the
majority of initial sales to occur through Origin (EA’s direct online service).
Origin sales are not tracked by NPD or any other third-party.
Earnings and target price revision
- 12-month price target: US$26.00 based on a PER methodology.
- Catalyst: Star Wars news/updates, F3Q’12 earnings, game sales
- Reaffirm Outperform rating.
Macquarie Capital (USA) Inc.
+1 212 231 0644
+1 212 231 6598
+1 212 231 0643
20 January 2012
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