Video games sure are slick these days, but the business hasn't eluded the economic downturn. So it's not surprising that shares of Electronic Arts (ERTS), one of the largest developers of interactive video games, have been slammed. The company's games play on all the major platforms, including Sony PlayStation, Microsoft Xbox, Nintendo, PCs and mobile devices. The stock hit a peak of $71 a share in 2005, but plunged to a 52-week low of $14.75 on Mar. 3, 2009. It has crept up recently to just $16.60, as some major Wall Street analysts continue to be negative on the stock.Some savvy pros, however, have moved bullishly and bought in as the stock was spiraling down. One big reason: With the share price so depressed, slumping some 75% from its peak, it has become so inexpensive that it should attract a buyer.

"The likes of Apple (AAPL), News Corp. (NWS), Disney (DIS) or Microsoft (MSFT) are the companies that could be interested in buying Electronic Arts at these low levels when new technology and innovation are expected to stir up fresh demand for the company's products," says Larry Haverty, who heads Gabelli Global Multimedia Trust, which owns shares.

Based on its current $16 a share, EA is valued at about $3.6 billion. "The company is really worth $5 billion," figures Haverty. His target for the stock is $40, given its potential takeout value, the improving fundamantals in the video-game industry and expectations of an economic recovery.

Tug-of-War


EA, which has developed a diversified portfolio of video products for sports, games, and casual entertainment, owns many of the popular titles, including Madden NFL, The Sims, and Need to Speed.

On Wall Street, it's a game of tug-of-war between the EA bulls and bears. Among the 32 analysts who follow the company, six recommend selling the stock, and 10 remain neutral. The other 16 rate it a buy.

The big bears, including Jim Yin of Standard & Poor's, believe weak consumer demand and high unemployment will keep game sales depressed. "Consumers will continue to buy the top-selling games but fewer catalog titles, and we believe the company's key franchises, including Madden NFL and NCAA Football, have been losing their appeal," says Yin, who rates EA a sell. He's concerned about the company's lack of new major game titles to offset this trend. "We also think consumers may delay purchases in anticipaton of the next generation of consoles," adds the analyst.

"A Good Operator"

Nonetheless, some enthusiasts see better sailing beyond the industry's current problems, even as they've scaled back their own earnings estimates for 2010 and 2011. "The longer-term outlook is bright for Electronic Arts," says Jeffrey Thomison, analyst at investment firm Morgan Joseph, who rates the stock a long-term buy with a two-year price target of $24 a share. (Thomison owns shares.)

In fiscal year 2012 and beyond, "Electronic Arts can benefit from a more efficient cost structure, strong product portfolio, potentially lower console prices, new hardware technologies that enhance game play and a better industry sales climate," says Thomison. For investors, exposure to the dynamic video-game industry over a multiyear period could be rewarding, he adds, and "we consider Electronic Arts a good operator with significant room for improvement."

Electronic Arts was in the red in fiscal 2008 (ended Mar. 31) and fiscal 2009. But Thomison expects it will be profitable again in 2010 and 2011. He forecasts earnings of 41 cents a share in 2010 and 60 cents for 2011.

A Boost from 3D?


In the meantime, the takeover factor that Haverty of Gabelli Global Multimedia Trust has raised is apt to fuel fresh buying in the stock. He argues that EA, which has a cash stash of $1.7 billion, will benefit strongly from new technologies such as 3D, which he expects will come sooner to the market than many analysts expect. "3D will be enormously popular with video-game players," says Haverty.

"Video games with a 3D component will be big for such new devices as Apple's latest computer tablet, iPad," says Haverty. He insists that with the advent soon of 3D, EA will be the big winner in the video-game derby. "And this is a big part of the reason why we think Electronic Arts is an attractive, compelling takeover target for the big technology-media companies," says Haverty. And he notes that with November 2009 acquisition of privately held video-game software developer Playfish, EA is now expanding into social network games, which is expected to be a fast growing market.

Electronic Arts spokesman Jeff Brown declines to comment specifically on whether the company has received inquiries for a merger or takeover from the tech biggies. But he says the company "would do what is best for our shareholders."

Editor's note: This story has been updated to reflect EA's correct cash holding.

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