The Daily Michael Pachter Post
Apparently, I have a nemesis.For every good, there is an evil. For every man who stands for order, there is one who stands for chaos. The Force has a light side and a dark side.
I’m not quite sure which side I’m on, but I know one thing: Michael Pachter is on the other side.
You remember Pachter. He’s misunderstanding the games industry at a dizzying pace. Thanks to DQ reader Dan Rowland, I saw what Pachter was up to this morning
(http://www.gamespot.com/news/2005/09/12/news_6133024.html):
Wedbush Morgan analyst Michael Pachter put a tiger in the tank of game publisher Electronic Arts this morning with a pre-bell memo that alerted investors to his upgrade of the stock…
Pachter said shares of EA could surge as much as 20 percent within the next year. Pachter sees short-term growth as well, predicting the company will deliver higher-than-anticipated revenues. "...At worst, we envision the company delivering revenues of $650 million, well above the consensus estimate of $625 million."
Dude, slow down. I’ve got ideas stacking up like bad Army Men games because you’re what I like to call the “What the Hell? Machine” and I have to write about you every day. I’ll pay you fifty dollars American to go on vacation for a week just so I can get caught up.
Just in case you didn’t hear me: fifty dollars. In cash.
In our last episode of the What the Hell? Machine, Michael said this:
I don't think there are four million people in the world who really want to play online games every month.
That still rocks me like a hurricane. It reminds me of this:
There is no reason for any individual to have a computer in their home:
--Ken Olson (President of DEC), 1977
Now he’s pumping EA, and pumping it hard. Look, my man, I know you make 200K+ a year and I write about things like “The Telecrapper” and my ass, but you are so, so wrong.
To begin with, just look at the numbers. This company is trading at over forty times its trailing P/E. That’s a growth stock, to be sure. And to continue commanding that premium P/E it must, well, grow—both revenue and earnings.
Let’s check the income statements for annual revenue:
March 31, 2001: $1,320,000,000
March 31, 2002: $1,730,000,000 (+31%)
March 31, 2003: $2,482,244,000 (+43%)
March 31, 2004: $2,957,141,000 (+19%)
March 31, 2005: $3,129,000,000 (+5%)
Now look at earnings growth:
March 31, 2001: -$17,900,000
March 31, 2002: $47,300,000 (N/A)
March 31, 2003: $317,000,000 (+570%)
March 31, 2004: $577,000,000 (+82%)
March 31, 2005: $504,000,000 (-12%)
We’re on our way to the moon, I tell you! The moon! Don’t step in that, though—it sure doesn’t smell like cheese.
Revenue growth slowing from 43% to 5% in the last two years. Earnings growth is now negative. That is the prototypical profile of a company that can’t manage its size. Remember, EA is dominant to an amazing degree in the software market, and they could only manage five percent growth last year. That’s not the profile of a company with a 40 P/E.
That’s not all, though. Remember that nifty exclusive license that EA bought from the NFL? Sixty million per, baby. That’s over eight percent of their fiscal year 2005 earnings! One exclusive license!
Here’s another problem. Companies don’t make money during console transitions—they lose it. The initial customer base for a new console is largely comprised of customers who already have a last-generation console. Buy an Xbox 360, buy an EA game, and that’s probably one game that you’re not buying for the original Xbox. Sure, it’s not an exact one-to-one ratio, but it’s not generally accretive, either. It will take several years, and much pain, to increase the total base of console users.
Add in EA mercilessly flogging their franchises instead of developing new IP, the increasing (and inexpensive) options for game rentals, the relentless attempt by Gamestop/EB to sell used games instead of new ones whenever possible, and the rise of online games with monthly fees (where EA is barely participating, even though it’s a major growth driver and a continuing revenue stream), and EA is in trouble. Big trouble.
I would have explained that last paragraph in more detail, but I have other, more important topics to get to, like mirror boobies and trembling lips at the pot roast dinner and Eli 4.1 making his own breakfast—much to our surprise.Just remember this: it’s very, very difficult for a company to market its way out of trouble. Not this kind of trouble, anyway. Maybe EA sandbagged their guidance, but if it didn’t, all aboard the Vomitron.
In closing, let me say this one more time: fifty dollars. That’s not a typo. Cash money. Two twenties and a ten, four tens and two fives, even fifty singles. Just let me know.
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