The poor performance of Electronic Arts Inc.’s “Star Wars Battlefront 2” was in the spotlight on the company’s fiscal third-quarter earnings report on Tuesday, but that didn’t hurt its shares.
Shares of Electronic Arts
rose more than 9% on Wednesday, after the video game publisher reported profit that was above Wall Street expectations, though revenue was weak.
EA said that the topline shortfall was due to disappointing “Battlefront 2” sales. The highly-anticipated mega franchise game suffered from a rocky launch due to consumer complaints surrounding the game’s microtransactions, or in-game purchases. Players felt there was too much emphasis on in-game purchases, making it frustrating to progress in the game.
EA nixed the in-game purchases just before launch, adding to the less-than-expected revenue in the quarter.
“This was definitely a learning opportunity,” EA Chief Executive Andrew Wilson said during the company’s quarterly conference call, according to a FactSet transcript. “In terms of ‘Star Wars’ ongoing, we remain committed to the franchise. The team is working diligently on updates and extra content for the live services around ‘Star Wars Battlefront 2’.”
Despite the flub, analysts remain upbeat on the stock, pointing to positives in EA’s digital business, as the industry continues to shift toward digital purchases.
“We thought the company did a decent job of working through some challenges during the period, to deliver solid underlying trends for most of its key franchises,” Stifel analyst Drew Crum wrote in a note to investors. “Our positive stance and buy rating is based on the belief that the company is well positioned to benefit from a favorable macro backdrop for video games, including an ongoing shift to digital, along with further momentum across the current hardware cycle.”
Crum has a buy rating and $129 12-month price target on EA.
Earlier this month, analysts at BTIG said that they missed the upside in the video game publishing industry. They said publishers are better able to monetize and continuously create better gaming experiences, ultimately leading to more engagement and profits.
Shares of Take-Two were up more than 7% after EA’s earnings and Activision Blizzard Inc.
shares rose more than 3%.
EA reported record revenue from digital sales. Digital net bookings—total revenue plus deferred revenue— for the trailing 12 months rose 18% to $3.4 billion, representing 67% of total net bookings during that period. And digital revenue in the third quarter was $780 million, up from $685 million a year ago.
“EA has delivered the leverage inherent in its business model on a combination of higher margin from an increasing mix of digital sales and better-than-expected cost control,” Wedbush analyst Michael Pachter wrote. “We believe EA represents a solid opportunity for investors to benefit from continued digital growth for the industry over the next several years.”
Pachter rates EA’s stock at outperform, which is equivalent to a buy rating, and he raised his 12-month price target to $138 from $136 following earnings.
Benchmark analyst Mike Hickey also said EA’s digital sales outperformed his expectations. Hickey rates the stock a buy, with a $141 price target.
EA reported strong results for some of its other titles, giving analysts confidence in their performance going forward.
“The increase in EA’s 2018 earnings per share guidance helped ease fears about the disappointing ‘Star Wars Battlefront 2’ sales,” wrote MKM analyst Eric Handler “We remain positive toward EA and its growth story as the 2018 outlook moves higher and the 2019 slate remains intact.
“EA should benefit from the continued growth from FIFA in a World Cup year, acceleration from the official March launch of Sims Mobile and new digital advances including unannounced subscription services and the continued expansion of live services.”
Handler maintained his buy rating on EA, while raising his price target to $137 from $132.
On average, analysts tracked by FactSet rate EA as overweight, and have an average $135.31 price target on the stock, which is a roughly a 4% premium to Wednesday’s trading levels.