Take a pass on Electronic Arts, says Roth

Roth Capital Partners analyst Eric Handler likes the restructuring plans just laid out by video game giant Electronic Arts (Electronic Arts Stock Quote, Charts, News, Analysts, Financials NASDAQ:EA), but he reiterated a “Neutral” rating on the stock in a Thursday report and kept a one-year target price of $112.00 per share.

Game developer Electronic Arts, which has titles such as The Sims, Apex Legends, FIFA and Madden NFL, said in a Wednesday SEC filing that it would be cutting six per cent of its workforce, about 780 jobs, and cutting down its office space. The efforts will be “focused on prioritizing investments to the Company’s growth opportunities and optimizing its real estate portfolio,” EA said in its filing.

EA saw revenue climb by a slim five per cent in its latest earnings report, the company’s Q3 2023, delivered in January. The topline was a miss of analysts’ consensus estimate, while net bookings for the trailing 12 months were down one per cent from a year earlier. Management guidance on its fiscal Q4 net bookings was also under consensus expectations at $1,675-$1,775 million.

On the restructuring, Handler said the plans will prioritize spending while evaluating the company’s real estate footprint and focusing investments on its best long-term growth opportunities. The last of these will include the shuttering of a number of games for which EA said it will incur a $65-$70 million impairment charge.

“No specifics were outlined, but we would not be surprised if multiple mobile titles were impacted along with some rationalization among the various racing franchises,” said Handler.

“We believe it makes a lot of sense for EA to narrow its focus on its highest ROI opportunities. As parts of this plan were already factored into 4QFY23 guidance and the initial view towards FY24, we are making no changes to our estimates,” he said.

EA’s share price has been sliding over the past couple of years, going from about $145 in early 2021 to between $110 and $120 as of late. 

Handler’s $112 target reflected at press time a projected one-year return of negative six per cent and is based on a 17.5x multiple of his fiscal 2024 EPS plus net cash. The analyst is forecasting full fiscal 2023 revenue and EPS of $7,117.4 million and $6.00 per share, respectively, and 2024 revenue and EPS of $7,430.4 million and $6.30 per share, respectively.