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Electronic Arts (EA: Nasdaq)

By Wedbush ($29.75, March 24, 2014)

We are maintaining our Outperform rating on Electronic Arts and increasing our 12-month price target to $37 from $30. Our new price target is based upon a forward price/earnings multiple of 20 times our fiscal 2015 earnings-per-share estimate plus $4 in net cash, in line with the company's historical multiple.

Last week, Electronic Arts (ticker: EA) delayed the release of the [ Microsoft (MSFT)] Xbox 360 stock-keeping unit (SKU) of Titanfall a second time. In an Electronic Arts blog post last Wednesday, Patrick Söderlund, executive vice president, Electronic Arts Studios, announced that the release of the Xbox 360 SKU of Titanfall had been delayed to April 8 (in fiscal-first-quarter 2015) from March 25 (in fourth-quarter 2014) in North America, and to April 11 from March 28 in Europe to give developer Bluepoint Games additional time for polish.

The latest delay had no impact on guidance. In a separate 8-K filing, Electronic Arts announced that the delay did not affect its fourth-quarter or fiscal 2014 guidance. Fourth-quarter guidance is for revenue of $800 million and EPS of nine cents, while fiscal 2014 guidance is for revenue of $3.91 billion and EPS of $1.30.

We believe the Titanfall delays reflect revenue management and an effort to maximize next-generation console sales, as opposed to any quality issues. We view the game as the first must-have for the Xbox One, and believe that it is in the best interests of Microsoft and Electronic Arts (near- and long-term) to maximize next-gen console sales, particularly with the industry's current-gen sales below expectations recently.

We believe that Electronic Arts has the lineup to deliver revenue and EPS growth for at least the next two years. We believe that Electronic Arts can grow revenues by $400 million per year, and deliver $0.50 or more in EPS growth for the next two years.

The shift of Titanfall on the Xbox 360 gives us great confidence in Electronic Arts' ability to deliver upside to first-quarter results, and limits execution risk in fiscal 2015. We believe the delay means that Electronic Arts will deliver significant upside to our current estimates, which are Street-high for the first quarter; we also believe that first-quarter EPS upside to consensus estimates is likely, and will cause many investors to view execution risk as minimal.

We are increasing our first-quarter 2015 estimates for revenue to $800 million from $660 million and for EPS to breakeven from a loss of 13 cents. We are lowering our second-quarter 2015 estimates to offset the first-quarter increases, and our fiscal 2015 estimates remain at $4.31 billion for revenue and $1.65 for EPS; however, our bias is that fiscal 2015 results could significantly exceed our current estimates. We will not adjust our fiscal 2015 estimates until the company provides greater granularity into its long-term release slate.

-- Michael Pachter

-- Nick McKay

-- Nick Citrin

The companies mentioned in Hot Research are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of Barrons.com or Dow Jones & Company, Inc. Share prices at the time the report was issued and the date of the report are in parentheses.

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