Electronic Arts' Q3 Better Than Expected, But Morgan Stanley Stays On Sideline

Electronic Arts Inc. EA shares spiked after hours Tuesday and continued higher Wednesday on positive earnings, but Morgan Stanley’s still not buying.

The Rating

Analyst Brian Nowak maintained an Equal-Weight rating on Electronic Arts and raised the price target from $120 to $126.

The Thesis

The company beat top- and bottom-line estimates by 3 percent and 2 percent, respectively, and Morgan Stanley attributed the performance to live services digital revenues.

“FIFA” and “Madden Ultimate Team” grew more quickly than forecasted, “Sims” outperformed with a pets and laundry expansion packs and the combined franchises helped drive revenues 31 percent higher than expected and up 39 percent year-over-year, according to Morgan Stanley. 

At the same time, Electronic Arts indicated interest in leveraging tax reform on buybacks, dividends or acquisitions.

“With more clarity on potential shareholder return expected at [fiscal fourth-quarter 2018] earnings, this messaging is likely to limit near-term downside in the name,” Nowak said in a Wednesday note. 

Although heartened by these circumstances, Morgan Stanley is waiting for a new title and the firm’s 2020 earnings driver before buying.

“While there isn't much tactical downside, we remain EW as EA's unfortunate string of missteps on its non-sports franchises — "Star Wars Battlefront" 1 and 2, the closure of Visceral games, "Mass Effect," and "TitanFall 2" — leave us without a clear catalyst beyond FY19, when EA begins lapping three consecutive years of strong "FIFA Ultimate Team" and the 2018 World Cup,” the analyst said. 

Price Action

At the time of publication, shares were trading up 7.81 percent at $127.97.

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Photo courtesy of Electronic Arts.