Thursday, March 24, 2005

Electronic Arts: Everybody Out of the Pool

I apologize in advance for quoting myself from a previous post, but here's what I wrote about Electronic Arts in January:
EA can't keep growing at its current rate. It's much, much easier for a company to go from one billion to three billion in revenue than it is to go from three billion to nine billion. At some point, scale just eats you up. And as your growth goes down, so does your P/E, and as that happens, the stock price starts to deflate. I believe it's entirely possible that this $65 stock price might be as high as EA gets, at least for the next several years.

Sexy company, growing quickly but starting to strain, sees itself as vulnerable. What do they do? They sell. As fast as they can.

Well, they waited too long. Here's a news blurb from Tuesday:
SAN FRANCISCO (MarketWatch) - Shares of Electronic Arts, the world's largest videogame publisher, dropped 13 percent Tuesday morning after it said sales and profit for the fiscal year ending in March would be below its prior forecast due to weak sales in North America.

And here's an excerpt from another story:
"Certain EA franchises have performed poorly and are showing signs of fatigue," wrote Bear Stearns analyst R. Glen Reid in a note to clients.

The stock is bumping around in the $55 range now. This is either a blip in the radar or a dam breaking. I think the story two months ago about EA looking to get into television was a major red flag. Whenever fast-growing companies suddenly start looking for growth drivers well outside their expertise, it's usually a sign, to some degree, of desperation.

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