Electronic Arts, Inc. (ERTS)

cracu2001 (91.81) Submitted: 8/07/07 8:57 PM : Start Price: $54.00 ERTS Score: 11.53

The company has a good business model where it benefits off sequels that generate substantial revenues without requiring as much R&D as the originals. It can leverage these "cash cows" like Madden to invest in the next generation of blockbusters. However, the business of developing video games is hit or miss and their stock is very expensive. Even if earnings rebound back to 2005 levels, the P/E will be above 30. Moreover, the console sales will be limited by the two leading manufacturers, Sony and Nintendo. PS3 still sells at ridiculous price and the Wii has capacity constraints. XBox dropped prices but I dont expect Sony to respond given their much larger market share. In addition, this is a somewhat cyclical industry since video game consoles are a discretionary purchase. With a shaky market, I would not count on EA to rebound any time soon. Expectations are much too high for this stock and I expect the stock to drop to the low $40 range within the next year.

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