Baird Equity research analysts Colin Sebastian and Rohit Kulkarni discuss some takeaways from their meeting with Electronic Arts Inc. (NASDAQ:EA)’s management.

Electronic Arts

This week, we hosted meetings with Electronic Arts Inc. (NASDAQ:EA) management, with discussions reinforcing progress in operating efficiency, credibility among investors, and improving outlook for growth and margin expansion. Titanfall also appears to be off to a good start, although sell-in will be limited out of the gate. All in, we believe that Electronic Arts Inc. (NASDAQ:EA) is on a better track, putting the pieces together towards hitting financial targets (20%+ operating margins), despite lingering industry-related risk factors, and we continue to be constructive on shares.

Increasing price target to $33 from $25

Based on what appears to be better visibility towards digital growth and ongoing expense management, we are introducing a F2016 EPS target of $2.00, and increasing our price target to $33 from $25, based on 15x average F2015E and F2016E EPS plus cash. In our earnings scenario analysis, we calculate $43/share upside case and downside scenario of $20-25/share. Near term, we are adjusting estimates to assume 2.4 million sell-in of Titanfall in F4Q with CY2014 total shipments of 6 million units.

Why we are more constructive

Our cautious view of Electronic Arts Inc. (NASDAQ:EA) in prior years was originally based on inconsistent financial performance, and a comparatively inefficient cost structure. In becoming more constructive on the stock earlier in 2013, we recognized management’s renewed focus on expense management together with a more realistic approach to guidance. Moreover, Electronic Arts Inc. (NASDAQ:EA) has now achieved a number of important financial, product and executive milestones, and we believe is generally on a better course.

Electronic Arts F2015 guidance will reflect tough Battlefield comp, but ongoing expense controls

We believe F2015 guidance will still be overshadowed by declines in current-gen software, although Electronic Arts Inc. (NASDAQ:EA)’s broad support for next-gen consoles positions the company well if hardware sales continue to ramp at a reasonable pace. For the year, EA’s top line will benefit from incremental contributions of Dragon Age, Sims, UFC and FIFA World Cup, offset by lower expected sales of Battlefield.

F2016 has the potential to be a breakout year, with key title sequels (e.g., next major Battlefield), the new Star Wars franchise, and next-gen console platforms reaching critical mass. Combining healthy revenue growth with operating leverage, we are introducing F2016 revenue and EPS targets of $4.3 billion and $2.00, respectively.