2005: EA
It seems that almost every industry analyst jumped on Electronic Art's jock last year right about the time we were all jumping off.Then, in the second half of 2005, EA puked all over its brand-new school clothes.
Lowered earnings and revenues estimates--several times. Made a bunch of games that nobody gave a shit about, and the ones that people did care about didn't sell as many copies as they expected. Bought up every exclusive license they could find as they turned into some bizarre version of the Hunt Brothers trying to corner the silver market. I'm pretty sure they have an exclusive license on my balls.
It's not that EA doesn't have strengths. They have plenty. The problem is that they've already leveraged those strengths beyond their reasonable limits, and all they seem to be doing in response is going out and buying everything that isn't nailed down (overpaying in every case). In other words, they have no internal energy left.
Here's a standard pattern:
Stage One: high-growth company can do no wrong. Never misses on earnings.
Stage Two: high-growth company starts adjusting revenue and growth estimates.
Stage Three: Company's growth rate slows. No longer really "high" growth. Starts buying up other companies in an attemp to pump up it's revenue growth. Many of these acquisitions will wind up not being accretive to the bottom line, and the quality of acquisitions deteriorates as they buy more and more.
Stage Four: Company starts blaming everyone else for its problems.
Stage Five: Company's growth rate continues to contract. Investors start selling stock. Company's P/E starts to shrink.
Every industry has companies like that. And EA has become one of those companies. After they adjusted revenue and earnings estimates for this quarter, they blamed the Xbox 360 launch. Now they would be absolutely justified in doing that if they had a strong lineup of launch titles, but come on! With the exception of Need For Speed: Most Wanted, which was a strong title, they shipped crippleware--every sports title was missing major features or content. How can they complain about sales if they're shipping garbage?
Here's EA's core problem: they're making a bunch of shitty games. You can mask that for a while with marketing, but it's expensive, and at some point, people start wising up.
Here's what I expect for EA in 2006: they'll continue to miss on revenue and earnings estimates. That will put pressure on the stock. At some point, there will be a huge management shake-up. Spore might temporarily gloss over their core issues, but at some point everyone is going to realize that they're leaking fuel. Lots of it.
<< Home