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The Bank of Montreal (TSE:BMO) has downgraded Electronic Arts (NASDAQ:EA) from an ‘outperform’ designation to a ‘market perform’ one following EA’s release of its Q3 2020 financial results. The bank now maintains a price target of $110 for the EA’s stock. Bear in mind that EA’s shares closed at $107.92 on Friday, around 2 percent shy of BMO’s new price target for the gaming company.
As a refresher, EA announced its financial benchmarks last week for the quarter that ended on the 31st of December 2019. The company’s total net revenue came out at $1.593 billion, marking an increase of 23.58 percent year-over-year. Moreover, the gaming giant’s net income posted an annual increase of 32 percent to land at $346 million. However, the company provided a major letdown when it reported earnings per share (EPS) of $1.18, a whopping shortfall of 112.7 percent against expectations for an EPS of $2.52.
Of course, the release of 'Star Wars Jedi: Fallen Order' proved to be the biggest story for EA during the quarter. Against original sale projections of 6 to 8 million copies, the company managed to sell around 8 million copies in Q3 alone and is now expecting a retail count of 10 million copies for the entire FY 2020.
EA’s staple offerings of FIFA and the Sims 4 also continued to post strong showings. As an illustration, FIFA Ultimate Team matches were up nearly 40 percent year-on-year while the Sims 4 surpassed 20 million players during the quarter.
While these performance metrics showcase a strong quarter for EA, the greatest determinant for BMO’s rating downgrade is the gaming company’s strategy for the FY 2021. During the earnings call last week, EA executives detailed plans to publish 14 new titles including the next battlefield game – expected in the fall of 2021.
In his investment note, BMO analyst Gerrick Johnson conceded that he was "encouraged by improvement in its [EA’s] sports games and strong performance from Star Wars." However, the analyst believes that "continuing the recent momentum could prove more challenging."
Mr. Johnson believes that EA’s momentum could stall as concerns mount regarding the gaming company’s ability to monetize existing titles even as it gears up for a "haphazard FY2021 lineup".
Of course, this cautious tone from BMO is at odds with the larger market where EA currently enjoys a bullish average sell-side rating. Moreover, EA’s Chief Financial Officer Blake Jorgensen declared during the Q3 earnings call that the company is preparing to launch offerings that will “blow people's minds” in the next couple of years as game developers exploit the enhanced computing power of next-generation consoles from Microsoft (NASDAQ:MSFT) and Sony (TYO:6758) expected toward the end of 2020 (read our related coverage here and here).
Interestingly, EA’s stock has posted gains of 17 percent during the past year. Moreover, since October 2019, the company has posted gains of 14.5 percent (based on Friday’s close). Bear in mind that the S&P500 has posted gains of 11.7 percent during the same time period. Notably, the gaming giant currently has a market capitalization of $32.60 billion.