Video game manufacturer and publisher, Electronic Arts Inc. (ERTS) shares fell 5.95% ($1.05) and closed at $16.61. The shares downfall was based on negative reviews for its flagship title Medal of Honor multiplayer game launched on October 12 in North America.
Investors appeared to be disappointed by the weaker-than-expected launch of this most-awaited game, leading to a drop in share price. In anticipation of the Medal of Honor launch, which was hyped for quite sometime, the company’s stock price had risen approximately 20% in the last three months.
The first person shooter Medal of Honor game was launched simultaneously on Microsoft Corp. (MSFT) Xbox 360 videogame platform and Sony Corp.’s (SNE) PlayStation 3 (PS3) and PC. Medal of Honor will release on October 15, 2010, in Europe.
The eleven-year old Medal of Honor video game has historically driven success at Electronic Arts. The new version of the game is set amid the rugged and hostile battlefields of present day Afghanistan. Gamers will play Medal of Honor as Tier 1 operators, a relatively unknown battalion comprising fictional characters, guided by the National Command Authority.
Despite strong pre release data, ratings given out by Gamerankings.com and Metacritic website confirmed that Medal of Honor’s rating was below its rival shooter games such as Microsoft’s Halo and Activision Blizzard Inc.’s (ATVI) Call of Duty.
Medal of Honor received the Metacritic rating of 74, while its rival game Call of Duty: Modern Warfare 2 received a Metacritic rating of 94. This could result in lower catalog sales at Electronic Arts.
The game, based on a modern day Afghanistan war-based shooter, allows players to take the role of Taliban forces and has already created controversies. The game has been widely criticized for its content. The British Defense Secretary, for instance, wants to ban the game as it objects to one of the options in the game’s multiplayer mode that allows players to take up the role of Taliban troops and slaughter U.S. soldiers.
Electronic Arts expects to sell 3 million units of its first-person-shooter title Medal of Honor. However, management disclosed to the New York Times that if it fails to reach its sales target, it may discontinue launching any other series of the game in the near future.
According to reports, GameStop stores in the U.S. military bases have stopped selling or advertising Medal of Honor and will avoid taking customer pre-orders for the game as a result of increasing content related controversies. This will definitely hurt sales and lower volumes at Electronic Arts.
Intense competition from the release of two of the biggest titles this year – Microsoft’s Halo: Reach and Activision Blizzard’s Call of Duty: Black Ops – and lower sales at GameStop could also negatively affect overall sales. Activision’s Call of Duty: Black Ops will be released on November 9 while Halo: Reach has been released on September 14, 2010.
Maintain Neutral
Electronic Arts’ improving title fundamentals (higher quality and revenue per title) will provide a fillip to 2011 revenues. Electronic Arts will release just 36 titles in fiscal 2011, with 15 titles in the third quarter and 8 titles in the fourth quarter. This compares with 54 titles released in 2010 (33% fewer titles) and 67 titles in 2009 (46% fewer titles).
Electronic Arts is poised for growth as it posted non-GAAP net revenues of $4.16 billion and had 27 titles that sold more than one million units in fiscal 2010.
Despite reducing the number of titles by 20% in fiscal 2010, Electronic Arts achieved market share growth with fewer than 20 titles released in fiscal 2010. Twenty of its titles in fiscal 2010 received the Metacritic rating of 80, indicating increased users. Management expects non-GAAP revenues per title to increase to $84 million in 2011 from $66 million in 2010 and $55 million in 2009. Lower titles imply an increased focus on quality that will push up revenues and margins.
Electronic Arts projects consistent revenue growth for the rest of fiscal 2011 with approximately 21.0% of total revenue to come in the second quarter, 38.0% in the third quarter and 26% to 27% in the fourth quarter.
Although the company continues to face stiff competition from Activision and Take-Two Interactive Software Inc. (TTWO), Electronics Arts will continue to gain market share due to its high quality game portfolio, in our view.
We have a Neutral recommendation on a long-term basis for Electronic Arts. Electronic Arts has a Zacks #3 Rank, which implies a Neutral rating on a short-term basis.
ACTIVISION BLZD (ATVI): Free Stock Analysis Report
ELECTR ARTS INC (ERTS): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis Report
SONY CORP ADR (SNE): Free Stock Analysis Report
TAKE-TWO INTER (TTWO): Free Stock Analysis Report
Zacks Investment Research
