Electronic Arts Scores with the Street

Investors bid the shares higher Friday on hopes the video-game maker's recent moves will boost growth

Electronic Arts' ERTS) video games have been getting long in the tooth and the Redwood City (Calif.) company struggled in recent months to keep up sales. But investors bought the stock on Feb. 2 as they hoped EA will overcome its challenges next year.

The whole industry has been in transition as gaming system providers upgrade their hardware, effectively forcing video game makers to slash the prices on their older products. EA's net income fell during the three months ended Dec. 31 by more than 38% compared to the prior year quarter to $160 million. Meanwhile EA's net sales for the quarter amounted to $1.281 billion, up only 1% compared to the same period of 2005.

But EA has been buying up new titles to boost its business. After taking criticism for putting too much focus on developing games for Sony's (SNE) PlayStation 3, EA recently bought Headgate Studios, which is focused on Nintendo's popular game system Wii. "With the recent tumultuous console launches and EA's ability to snap up smaller developers to fill product gaps, we continue to believe the firm has the resources to maintain its lead in video game publishing," Morningstar analyst Norman Young said in a research note.

EA has taken other recent steps. For example, the company signed an agreement to publish Pandemic Studios' Mercenaries 2: World in Flames for the 2007 holiday season. And EA bought Digital Illusions, which develops games like the Battlefield series, during the December quarter. Meanwhile EA continues developing titles like Spore, developed by The Sims creator Will Wright, in which players guide the evolution of microbes into an intelligent, tool-using race.

"The past several years have been about investment. The coming years are about growth and reward," said CFO Warren Jenson in a press release late Feb. 1.

Investors bid up the stock 4.1% to $52.60 in early afternoon trading on the Nasdaq Feb. 2.

Now that EA has launched its next generation of games, Deutsche Bank analyst Jeetil Patel thinks there's more visibility into the company's coming sales, which removes a key risk. Patel upgraded EA stock to hold from sell, noting the company's improved profitability outlook. (Deutsche Bank does business with EA, but the analyst certifies the accuracy of views expressed in the report.)

Patel wasn't the only one to like EA's new games.

"We favorably view ERTS' calendar 2007 game lineup and renewed focus on the Wii, but remain cautious of its PS3 exposure and lofty valuation," Standard & Poor's equity analyst Clyde Montevirgen said in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) Montevirgen kept a hold opinion on the stock.