Time To Buy Electronic Arts Shares
Kate DuBose Tomassi, 06.07.06, 10:46 AM ET
Video-game maker Electronic Arts is experiencing tough times, but UBS Investment Research recommends longer-term investors to buy now, as prior cycles indicate that the shares should recover.
"Sales and earnings are down, the video game market is awful, and the stock is still expensive," said UBS analyst Michael Wallace in a report Wednesday. "But wait -- we saw the same thing in spring 2000 at the bottom of the last transition. When people assume the worst has historically been the best time to buy the stock."
Electronic Arts (nasdaq: ERTS - news - people ) has been in a "downward spiral" since March 2005, according to the analyst. Part of this is due to the difficult console transition, he said. Microsoft (nasdaq: MSFT - news - people ) continues to ramp its XBox shipments, and Sony (nyse: SNE - news - people ) and Nintendo (other-otc: NTDOY.PK - news - people ) expect to release their new consoles by the end of the year.
But the pain for Electronic Arts is also company specific with lower game quality, a lack of innovation and missed shipments, he said.
And research and development spending will likely be higher over the next two years while the company builds its presence in mobile and online games. Moreover, the company spent almost $700 million to purchase Jamdat to get into the mobile games market, said Wallace. This higher than expected spending pushes out earnings recovery, he said.
Wallace said he expects operating margins to improve to over 20%, however, when research and development spending drops off in 2008.
While the analyst said he doesn't expect significant improvement in earnings-per-share until 2009 or 2010, he believes investors will revisit the stock at the end of this weak period, which should be over in the next few months, making this current trough a good time to buy.
The analyst reiterated a "buy" rating and $64 price target on Electronic Arts shares.
[Harry: If this analyst is counting on mobile games to save ERTS, he has seriously mis-calculated. Most of the power of mobile games is tied to the roll out of 3G. Carriers need to invest billions of dollars in order to increase the wireless data speeds to make network games take off. It is just not that compelling a "user experience" right now. |
