Electronic Arts May Have Lost Its Creative Way, Jefferies Says In Downgrade

Monetization ceilings and creative challenges were cited by a Jefferies analyst in a Thursday downgrade of Electronic Arts Inc. EA.
The Analyst

Analyst Timothy O’Shea downgraded Electronic Arts from Buy to Hold and lowered the price target from $139 to $95.

The Thesis

Jefferies believes growth for Electronic Arts' key profit engine "Ultimate Team" is plateauing, O'Shea said in the downgrade note.

The consensus EPS estimate looks aggressive, the analyst said, adding that he fears the company may have lost its creative way.

“Set against a backdrop of weaker (potentially declining) 'Ultimate Team' revenue, we see risk to forward EPS estimates as EA brings a slate of unproven games to market in 2019."

The upcoming "Anthem" release looks "technically ambitious and potentially rushed," O'Shea said.

While "Titanfall 3" looks promising, the previous two games in the series posted lackluster sell-through, he said.

Jefferies reduced its 2020 and 2021 EPS estimates for Electronic Arts by 7 and 13 percent, respectively.

The research firm expects margins will compress by 300 basis points year-over-year as "Ultimate Team" growth decelerates. Google search trends suggest a five-year decline in interest in the game, O'Shea said.

“'Ultimate Team' is EA's highest margin business, generating revs by selling virtual goods. We attribute the softness to competition, with fewer gamers entering the top of the UT funnel."