Electronic Arts (EA) stock got not one but two price target boosts from Wall Street analysts on Wednesday, and shares of the gaming software company have been trading higher on the news.
The narrative continues to improve for EA stock, which has absolutely walloped the market in the last year; its 82% gains over that time demolished the returns of the S&P 500 by 75 percentage points.
Rivals Take-Two (TTWO) and Activision Blizzard (ATVI) also trumped the benchmark index with one-year returns of 33% and 16%, respectively.
But even after EA’s remarkable rally, Wall Street thinks EA stock has room to run.
Quite the Pipeline O’ Games
Brean Capital, which already had a “Buy” rating on EA stock, raised its price target for shares from $66 to $75 a pop. Seeing as EA stock had already hit the $66 level, the firm pretty much had to raise the price target or downgrade EA to a hold for its recommendation to make any sense.
The real lift for the EA stock price came from investment research firm Jefferies, whose name carries far more weight than Brean Capital. Moreover, Jefferies previously gave shares a $58 price target and a “Hold” rating; yesterday the firm boosted its target to $80 per share and upgraded the stock to a “Buy.”
The firm also raised EA stock’s earnings per share estimate for fiscal 2015, hiking it from $2.76 to $3.08, well above the current consensus of $2.85. Jefferies outlined the rationale behind its decision:
“EA looks well positioned against two multi-year tailwinds: faster than expected console sales and the transition to higher-margin digital revenue. On top of this, EA’s multi-year game pipeline looks the best we’ve ever seen, starting this holiday with Star Wars Battlefront. And the company will return 50% of FCF to investors starting with a $1B, 2-yr buyback. Based on earnings power, we think the stock has plenty more room to run.”
Star Wars Battlefront is expected to be a big boost for the company, and that doesn’t seem like much of a stretch. After all, EA secured a 10-year licensing deal with Disney (DIS) to use the Star Wars name, and EA has made its bread-and-butter off such deals with FIFA, the NFL, the NHL, and the NBA for much of its recent history. (The FIFA and NFL deals are both exclusive, the NHL and NBA deals are not.)
Although EA’s licensing deals have come to define the company in its modern era, they’ve also sparked a ton of criticism from gamers, who argue that exclusive deals disincentivize the innovation we’d see if there were other competitors. Gamers rejoiced when news broke that a Madden competitor, Joe Montana Football 16, was finally in the works. (However, the game won’t use real NFL jerseys or current players.)
But that’s not as much of a factor with Star Wars as it is with the Madden and FIFA franchises, and with Star Wars Battlefront expected to be a blockbuster game (surely boosted by hype for the upcoming movie), I expect good things for EA stock going forward.
As of this writing, John Divine was long Jan 2017 $50 EA call options and Jan 2017 $60 EA call options. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
