Why Electronic Arts Shares Popped

Why Electronic Arts Shares Popped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Electronic Arts surged 10% this morning after Needham & Company upgraded the video game publisher from "hold" to "strong buy."

So what: Along with the two-notch upgrade, analyst Sean McGowan planted a price target of $33 on the stock, representing about 37% worth of upside to yesterday's close. While value investors might be turned off by the stock's solid return in 2013, McGowan sees plenty of room to run given the strong signs that EA's top- and bottom-line growth will continue to accelerate.

Now what: Needham raised its 2014 EPS estimate for EA from $1.20 to $1.35, from $1.60 to $1.80 for 2015, and from $2.00 to $2.30 for 2016. "We are upgrading to a Strong Buy with a $33 PT in light of the positive 2Q revenue surprise, impressive opex control, impending console refresh cycle, and longer 'tails' associated with digital gaming," Needham noted. More important, with EA shares off about 10% from their 52-week highs and trading at a PEG ratio of just above 1, I'd agree with Needham that investors have room to benefitfrom those positive trends.

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