BOSTON (CNN/Money) -
Electronic Arts CEO Larry Probst said on Monday that holiday sales of the company's video games have been mixed. Some are outselling expectations, while others are not living up to EA's hopes.
This is a tepid statement, coming as it did on the tail end of a nice run-up for the stock. EA's stock has gained 15 percent since the start of the quarter -- 11 percent of which came last week after Nintendo announced strong initial sales of its next-generation handheld device. As such the company is currently just about at the mean target price projected by the 16 analysts covering the firm.
Buying opportunity over?
Maybe not. Investors who missed scooping up some EA (Research) shares for the holidays may get another opportunity when November video game sales numbers are released on Thursday.
Many analysts I spoke with think that the company will lose its pole position to Microsoft's insanely popular Halo 2 game. What's more, those analysts expect an actual decline in year-over-year November sales. They think December totals could show more of the same.
As a company that has long dominated the video game market, EA isn't accustomed to hits like this. Neither is Wall Street, which may overreact on the negative side when these numbers are released -- just as it overreacted on the positive side to the Nintendo data.
The Nintendo data was promising -- the company sold 500,000 units of its new handheld during its first week. But even if Nintendo continues to beat expectations, we're talking about less than $20 million in revenue for the year for EA, a company that in the last fiscal year saw sales of $3.22 billion.
"That's why the stock's been acting better," says David Farina, an analyst with William Blair. "People think 500,000 units is a lot of units. It's not. It's a great start."
P.J. McNealy, an analyst with American Technology Research, says with a snort, "It's not a material amount."
Employee relations
EA has another source of unsettling news: unhappy employees who say they are overworked and underpaid. But that too could enhance the buying opportunity.
While it's too early to tell how a class action lawsuit against the company will unfold, a leaked memo reportedly written by Rusty Rueff, senior vice president for human resources at EA, hints at possible reforms -- like paying overtime. Most company observers say that if organizational changes are made, an increase in R&D costs would result, but these observers are quick to quell any serious concerns about margins.
The employee rumblings "are nothing that other video game publishers haven't faced," McNealy says. "It's possible that it can raise the R&D line for next year, but we're not taking that number up materially at this point."
Despite these misses, Microsoft's gains, and the somewhat tepid progress reports offered by the CEO, there's a lot to like about EA.
"I've had a buy on this company since 1996 and haven't taken it off," Farina says.
EA is a perennial top dog in the video game market. It's created a pretty incredible model for itself -- essentially booking recurring revenue by regularly releasing sequels to proven successes, such as John Madden Football.
If the stock plummets toward the end of the week with the November sales numbers, you should consider increasing your position in the company.
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