Is Electronic Arts Worth Playing?

By Glenn Curtis | October 19, 2009 AAA

When I was a kid, video games had just begun to come out. I was admittedly addicted. I'd play for hours on end until my mother had to physically make me stop. And to be honest, I don't see that changing anytime soon, which is why I'm optimistic about the space and companies like Electronic Arts (Nasdaq: ERTS), which publishes games. Do I think it's a good stock to buy right now? Here are my thoughts on the company and the situation.

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Game On Or Game Over?
Electronic Arts has definitely been producing. It has beaten expectations the last two quarters, and its shareholders must be a fairly happy lot as the stock price has come off its lows. But I don't sense a great deal of upside in the near-term. The primary reason? Price. The shares are probably fairly priced at 22.6 times this year's estimate, which is currently 90 cents.

The stock's proponents might argue that the company is expected to show solid growth from this year to the next, and that the stock is probably worth a look based on that. In fact, the estimate for next year is $1.19, which implies an expected growth rate of about 32%. But I'm not overly confident in its ability to achieve that estimate. After all, it's a long way away, and many things could potentially go wrong between now and then. Then again, even if it were to hit that estimate, is it really a bargain? The company trades at about 17.1 times that $1.19 estimate, so I don't find it that tempting.

Per CNBC, Electronic Arts is due out with its earnings October 26. The estimate in the public domain is 6 cents. I sense it could meet or beat that expectation. If I'm right, the shares could certainly get a bit of a near-term rise. But again, I think it's too expensive, and I'm skeptical about next year's earnings potential, so I'll be on the sidelines. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

I'm also concerned about the near-term demand for video games across the board. Remember, they aren't cheap, and with consumers still smarting from the recession, I'm not sure how many will have the money or want to spend it on such items.

Are Other Players In The Space Worth A Look?
I'm not biased against Electronic Arts. To be fair, I'm also not particularly taken in by Activision Blizzard (Nasdaq: ATVI), which publishes games. At 19.3 times this year's estimate of 65 cents, it's not cheap either. New York-based Take-Two Interactive Software (Nasdaq: TTWO) is no bargain either. The publisher is expected to publish a big loss for this year.

Actually, I'd rather play Microsoft (Nasdaq: MSFT), which some speculated might want to buy Electronic Arts, but Microsoft apparently denied it. My sense is that the Washington-based company, which is kind of synonymous with computing, has a lot of upside potential. It trades at about 15.9 times this year's estimate and, in my mind, should be trading way above its current price given its history, deep pockets and products.

Bottom Line
I like Electronic Arts, but in the near term I don't think it's a great place to be. It's too expensive, and I question the near-term demand for video games almost across the board. (For related reading, check out Power Up Your Portfolio With Video Game Stocks.)

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