May 04, 2012 at 15:44 PM EDT
Citi Says Buy EA Before Earnings, Sees Q4 Beat & 70%+ Upside
Shares of Electronic Arts (EA) were recently down 3.6% in late afternoon trading, down nearly 20% since it’s last quarterly earnings report in February. However, Citi analyst Neil Doshi is optimistic ahead of the company’s earnings report on Monday. He is modeling for the company to beat consensus estimates and thinks the stock can climb [...]
However, Citi analyst Neil Doshi is optimistic ahead of the company’s earnings report on Monday. He is modeling for the company to beat consensus estimates and thinks the stock can climb to $26, a 72% gain from its current level of $15.11.
Read highlights of his note below:
We are looking for $971MM in Non-GAAP Revenue, $87MM in Non-GAAP Operating Income loss, and $0.17 in Non-GAAP EPS, vs. the Street at $960MM, $82MM and $0.16. Both our and Street estimates are within guidance range. Based on intraquarter channel checks and our model sensitivity work, we view Street FQ4 bottom line estimates as reasonable, but note that there could be some risk due to UK retailer Game Group’s bankruptcy. We think investors will be focused on two things: 1) FY2013 revenue and EPS guide (we think Street EPS estimates of $1.13 are reasonable); and 2) Star Wars subscribers & health of the overall Star Wars MMO game. We note that the stock has traded off 20% since reporting FQ3 results (Feb 2 – May 3) – as a result, expectations are heavily muted going into the FQ4 print.
Our FQ4 Fundamentals Call Is Negative – For FQ4, we are expecting an EA’ Non-GAAP revenue to decline 2% Y/Y vs. 17% Y/Y growth in FQ3 – 19 points of decel on a12 point harder comp. We anticipate a Y/Y Non-GAAP Op Margin of 9.0%, down 220 bps Y/Y.
We Reiterate Our Buy Rating – We think the ~27%YTD correction in the stock creates a good entry point: 1) EA has been showing strong op margin improvement; and 2) Valuation is compelling at 14x CY12 PF EPS. We think investors will be focused on the FY13 title slate to be announced on the earnings call, comments around Star Wars subscribers, and traction in EA’s digital business. Risks include: 1) Intense competition on Social &Mobile; 2) Loss of key executives, and 3) New WoW expansion which could put pressure on Star Wars subs in CY 2H:12.
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