The Force Isn't That Strong at EA

Not so long ago in this very galaxy, Electronic Arts Inc. (Nasdaq: EA) heaped great expectations on an ambitious video game… Star Wars: The Old Republic. The goal was to let fans of the franchise, for a monthly fee, explore their inner Darth Vader by fighting with light sabers and using Force Choke on those pesky Ewoks.

Retaining players has been a tiny bit of a challenge, and EA has other matters to address.

The company reported its earnings and guidance last week, and the future was not shining. EA set its fiscal first-quarter 2013 revenue guidance at $500 million and loss per share at $0.40 to $0.45. According to brokerage firm Stern Agee, that fell below analyst consensus estimates of $581 million in revenue and loss per share of $0.33.

EA’s full-year fiscal 2013 revenue guidance of $4.3 billion in revenue and earnings per share of $1.05 to $1.20 also fell below the consensus estimates of $4.5 billion in revenue and $1.14 earnings per share.

That soured investors. EA’s shares dropped to $13.83, a new 52-week low, during trading on May 8 after the company reported earnings and guidance. Shares closed at $14.41 yesterday.

Stern Agee, in a report on EA, looked for a silver lining in the results: “Management indicated that it has begun investing in next-gen consoles. We continue to believe the next-gen console cycle will begin in [calendar year 2013] and shares of EA are likely to be re-rated higher in anticipation.” Stern Agee has EA at a Buy with $22 as the price target.

Winning in the video game wars is not easy, even for a mainstay such as EA. While the company has a slew of titles to work with, the high-profile Star Wars game is drawing special attention. EA said The Old Republic had 1.7 million active subscribers at the end of its fiscal third quarter. By the end of April, that fell to 1.3 million subscribers. The company attributed much of that decline to casual players not continuing with the service after the free trial periods end.

EA said The Old Republic game service is profitable, and initiatives are underway to grow subscriptions. Furthermore, the game represents what EA called a “mid single-digit” percentage of its total profitability for fiscal 2013.

EA has many other ponies in this race, including titles such as its Battlefield action games and FIFA Soccer for sports fans. The Old Republic may be a new title for the company, but it is not surprising that investors are watching how well it performs. So-called massive multiplayer online games can be substantial revenue streams for game publishers if they catch on. World of Warcraft published by Blizzard Entertainment, a subsidiary of Activision Blizzard (Nasdaq: ATVI), boasted some 10.2 million subscribers as of last December. That is huge in this often fickle market, especially since World of Warcraft debuted in 2004.

Given that kind of potential, though, EA needs to snatch a bigger piece of the online gaming market if it wants to quiet its doubters.