Event

• We believe declines on concerns over Star Wars and NPD data are overdone.

Impact

• 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:

1)  Speculation 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.

2)  Some 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

• No change.

Price catalyst

• 12-month price target: US$26.00 based on a PER methodology.

• Catalyst: Star Wars news/updates, F3Q’12 earnings, game sales data

Action and recommendation

• Reaffirm Outperform rating.