Analyst Labels EA ‘Dangerous’ Investment

Analyst David Trainer has come out under investment blog Diligence Institute to talk about EA’s dire financial prospects. Trainer goes so far as to call its stocks a dangerous investment.

Before you ask about his prospects, Trainer is a hedge fund manager and CEO of New Constructs, an independent research firm that specializes in getting key insights from financial footnotes and annual reports. He also talks about being a gamer himself.

Trainer observes EA’s stocks tumble early last week after DICE’s announcement that they were halting future projects to fix Battlefield 4. He claims that it confirms what he’s known all along from observing dipping sales of the company’s key franchises. Trainer states that the company has been pumping capital into development of these games at a constant rate without growth in profit after taxes.

Beyond the numbers, Trainer argues EA is faced by an impossible challenge, one that, arguably, other major third party publishers like Activision and Ubisoft also have to face head on. He explains that the games business is different from the film and book businesses, where you can make money back publishing other entities’ content, and keep their competitive advantage in distribution. Game companies rely on their own content, aka games, and if their current breadwinners aren’t making enough money, they are pressured to make new franchises that will, and this balance between maintaining older games while making new ones becomes harder to do through the years as costs keep rising, with no signs of stopping.

Trainer also notes EA’s terrible reputation with gamers, and concludes by saying that the stock is overvalued dangerously. Overall, citing the industry’s general unpredictability, he claims it is untenable to keep EA valued the way it is. The implication, of course, is that that stock will dip, making it a disaster for EA and its investors.

Whether you are an EA fan or not, Trainer’s analysis cuts incisively on the state of gaming on the financial end. We may take for granted that these big AAAs go for big cash grabs, perhaps complaining they don’t work on our favorite games, but as Trainer points out, these companies are taking high risks that put them individually at risk. We may have had reason to complain that these big AAAs keep coming up with the same old shooters. Now, there may be new reasons to gripe, as doubt is raised that these companies can keep churning out hyperexpensive games, especially at the cusp of a new generation of consoles. You can check out a podcast where Trainer talks to radio broadcaster Chuck Jaffe about his thoughts in detail here.