Why Analysts Are Loving EA More and More After Earnings

Judging by the way Electronic Arts has performed for this quarter, and even in 2014, it might be hard to believe that it was only about a $15 to $20 stock for five of the past six years. At one point, EA and other makers of $50 and $60 console games were being economically challenged by the freemium game model to the point that many investors started to question its relevance. Now EA has proven to be a highly successful turnaround story.

Here were a few key points from the earnings report:

• The video game designer had $1.22 in earnings per share (EPS) and $1.43 billion in revenue, versus Thomson Reuters consensus estimates of $0.92 in EPS and $1.29 billion in revenue.
• For the calendar year 2014, Electronic Arts was ranked as the top publisher on PlayStation and Xbox One consoles in the world.
• Electronic Arts repurchased 2.5 million shares for $97 million under its $750 million share repurchase program initiated in May 2014.
• For the fourth quarter, revenue is expected to be $830 million and EPS is expected to be $0.22. There are consensus estimates of $0.26 in EPS and $911.64 million in revenue for the fourth quarter.

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What you will have noticed is that the video game giant crushed its expectations, but the guidance for the coming quarter seems low. With how much the stock was down ahead of earnings, the investment community wants to treat this report as an earnings beat with potentially sandbagged guidance. EA remains a turnaround story with more revenue growth expected by analysts next year over the current year. Also, the difference between net revenue on a GAAP and non-GAAP basis is high, with deferred net revenue (for online enabled games) being listed as $325 million that was not counted for the quarter ahead in the non-GAAP revenues that analysts use.

Some of the most recent analyst calls for Electronic Arts are taking these earnings and guidance into account:

• Barclays maintained an Overweight rating for Electronic Arts and raised its price target to $56 from $48.
• Sterne Agee has a Buy rating and moved its price target up to $58.
• Baird maintained its Outperform rating and increased its price target to $56 from $45.
• Stifel has a Buy rating and adjusted its price target on the shares to $59 from $53.

Now put this into context versus a year ago. The January 15, 2014, share price for EA was almost $22, and the January 31, 2014, was just above $26. Back then, the short interest was 34.4 million shares for mid-January and 41.5 million shares for the end of January. That short interest now is closer to 15 million shares. It turns out that just about everyone loves a good turnaround story.

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The positive financial results from the third quarter spurred shares to gain over 13% to $54.90 Wednesday. Earlier in the day, shares hit a new multiyear high as well. The 52-week trading range is $24.66 to $55.16.