Electronic Arts is driving away potential investors despite offering a compelling proposition, according to industry analyst Michael Pachter.
With management indifferent to its investors needs, many are tiring of waiting for performance from the company, and dumping EA shares in favour of alternatives in an already depressed market.
"We think that EA shares present a compelling value, particularly if the company is able to deliver on its plan to generate over USD 3.00 in EPS two years from now. At USD 24 (the after market price) and with around USD 8 per share in cash and investments, EA shares are trading at a puny 5.5 times its likely earnings two years hence," wrote Pachter on Friday.
"The reason for this low multiple is evident - investors don’t believe it. Many long-term investors have apparently abandoned EA shares over the last several months, and the dearth of new investors has created a supply-demand imbalance for the shares, driving the price lower.
"Management’s indifference to the needs of its shareholders is striking, especially in an environment where almost all stocks are depressed, presenting compelling investment opportunities elsewhere. We think that many shareholders are tiring of the wait, and a large number have defected," stated Pachter.
However, Pachter said that there is strong evidence that Electronic Arts – publisher of FIFA, Madden and Tiger Woods titles – is on a road to improvement, with good management and products, but the company refuses to cater to investor needs.
"This does not mean that we lack confidence in the company, its management, or its products. On the contrary, we think that EA is executing quite well, with tangible improvements in game quality (as evidenced by much higher Metacritic ratings), robust sales of new releases, and a very strong game line-up.
"In fact, we think that the company is in a very good position to gain market share from its core business next year.
"However, management has demonstrated an uncanny ability to snatch defeat from the jaws of victory in the eyes of investors, and we think that these old habits will take a long time to die," added Pachter.
GamesIndustry.biz reports this morning that Electronic Arts stock has dropped almost 18 per cent since Thursday's financial results.
In comparison, Pachter pointed out that rival publisher Activision instils confidence in its investors for future growth, while EA's attitude remains aloof.
"The reason for the disparity in valuation is simple: investors believe that [Activision] has 'good' management, given that the company has consistently beat expectations and raised guidance, while being incredibly investor friendly; in contrast, investors appear to believe that EA has 'bad' management, given that the company has consistently missed expectations and lowered guidance, while projecting an appearance of smugness bordering on hostility to investors," he wrote.