The old stock market adage that goes “Buy low; sell high,” is the advice that some Wall Street analysts are giving as Electronic Arts, stock has reached a new 52-week low. The shares of EA shares closed at $40.86 on June 6, beating the former record of $41.10, posted last year.
While the new low point is bad news for EA, stock market watchers see this as an excellent opportunity to buy EA shares at a bargain basement price. Shawn Mine, of Friedman, Billings and Ramsey has given EA an “Outperform” rating and stated, "With growth returning to the video game sector in 2007, we expect a sharp snapback in FY08 earnings as Research and Development spending begins to flatten out against rising revenues."
While profits in 2007 may start to offset declining R&D costs, another factor that will be crucial in EA,s comeback is its recent new direction in business strategy, to innovate and develop new intellectual property. The recent downturns of EA stock may not only be a reflection of high R&D costs, but the reaction of the gaming community against the trend that EA has taken for almost a decade- a heavy dependence on game franchises and pattern of buying out competitors. This business model has been often pointed to as the reason for EA,s lack of motivation in producing fresh material.
In May of this year, EA gave up the rights to their perennial franchise, the James Bond 007 series, to Activision. The titles had seen better days, but the Bond titles continued to be released year after year, in spite of obvious signs of the franchise getting rather long in the tooth. EA explained why they dropped the title and offered a solution to what many have been pointed to as Electronic Art,s Achilles heel:
"EA has decided to conclude our agreement for the James Bond license. The current contract was set to expire in 2009. This was a good relationship with MGM and it produced a lot of great games. While movie games will always be in our portfolio, EAis moving away from licensed properties and committing our resources to wholly-owned IP [intellectual property] created in our own studios. Wholly owned properties allow better financial margins and more creative control to develop the type of games that consumers want." (emphasis added by GamerNode).
Whether EA will be able to pull out of its tail spin is entirely dependent on the success of producing fresh, new titles for gamers. Wall Street believes they can do this. The gaming community is waiting on the sidelines to see if this really comes to pass.
