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Ea Stock

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Warren Buffett Stock Analysis
ELECTRONIC ARTS INC Stock market is much riskier than people think due to variation of market conditions. Before making a smart investment in a company, investors should observe the performance in the past and predict the future trend. To identify if a company is worth investing in, Warren Buffett, one of the greatest investors in the world, recommended four aspects: 1) Is the business understandable? 2) How are long term prospects of the business? 3) Is the management of that business honest and competent? 4) Is the value of that business worth it to invest?
In this paper, EA, Inc. will be evaluated as an example.

UNDERSTANDABILITY Electronic Arts, Inc. (EA) is a company which leads the global entertainment software and represents the trend of development of this industry. The company develops, publishes, and distributes entertainments software all over the world for video game systems, personal computers, wireless devices and the internet. EA markets its products under four brand channels which are EA SPORTS, EA, EA MOBILE and POGO. As announced in fiscal 2009, EA posted GAAP net revenue of $4.2 billion and had 31 titles that sold more than one million copies. EA was listed on NASDAQ with its business spread in 26 countries and employees more than 7100 in the worldwide. LONG TERM PROSPECTS In these recent years, American electronic games industry is developing rapidly and has accelerated its speed of globalization. In this situation, EA comprehensively used of several of media technologies to combine with the ideas of novelists, film directors and musicians to create new products, which have been able to lead the trend of interactive entertainment. EA entered the current game market in 1997 with Origin Systems which provided a famous Massively Multiplayer Online Role Playing Game (MMORPG) named Ultima Online. It was a virtual fantasy world that supported thousands of players from around the world. At that time, this game could be said as ambitious because the new technology and new idea which had never been attempted before. This was the first true massively multiplayer online game which was really creative. EA had never set foot in this area of online games, but except for some difficulties in the beginning, Ultima Online had been achieved great success that the game is still operating even today. Although Ultima Online brought great benefits to the company, other efforts, such as Motor City Online, Earth & Beyond and the Majestic, had a very short life cycle. In 2006, EA bought Mythic Entertainment which is the creators of Dark Age of Camelot. Nowadays, Ea is continuing to support this game, and studios are engaged in the development of a new product called Warhammer Online. EA也向休闲玩家通过POGO.com提供一些简单的在线游戏。 EA also offers some simple online games to casual gamers through POGO.com. There are a lot of free games listed on this website. POGO.com is a partner of AOL (America Online), which provides a chatting room service that makes players feel like a community. Recently, EA is trying to expand markets scale to dig more developing opportunities. Under this situation, there is reason to believe that the development prospect of EA is really optimistic.

MANAGEMENT Trip Hawkins worked in Apple, Inc. before he founded EA in 1982. He was addicted in games so that he decided to create EA to make enough personal computers popularized and so to organize his own players groups. However, when he graduated from Stanford with MBA, his ambitious was to entertain all the players like him. Hawkins also would like to make gamers to earn the same respect, attention and encourage as other media workers'. He hoped that the EA could become such a company to let the game industry be as important as movies, books, and music. Under the leadership of Trip's idea, the Board of Directors of Electronic Arts, Inc. has adopted a proper management mode. As stated in EA official website, 1. The Directors have full and free certification to access to officers, employees and the books and records of EA. 2. Any meetings that a director requires to initiate with officers or employees may be arranged by a permission of the CEO, the Corporate Secretary, or directly by the director. 3. Directors should learn how to use their judgment wisely to make sure that any such contact will be not disruptive to normal EA's business operations. 4. The Nominating and Governance Committee and the Compensation Committee shall jointly oversee the evaluation of the CEO at least annually. 5. The evaluation will be used by the Compensation Committee in its consideration of the compensation of the CEO. 6. The Board will determine policies and principles for selection of the CEO and policies regarding succession in the event of an emergency or the retirement of the Chief Executive Officer.
(http://investor.ea.com/analysts.cfm)
It cannot be denied that this kind of managerial process is rigor and centralized. However, after decades' operating, there is reason to believe that EA has develops a successful management system to compete with others.

PRICE According to a variety of valuation models, the intrinsic value of the company can be seen in the following. EA Price Valuations | Constant Growth Model | N/A | Sales per Share Model | $52.26 | Dividends per Share Model | N/A | Book Value per Share model | $41.38 | Free Cash Flow per Share Model | $35.8 | Relative P/E Model | $-72.88 | Goldman Sachs Model | N/A | Growth Opportunities Model | N/A | Stock Price Forecasting Model | N/A | Buffett Owner Model 1 | $19.63 | Combined Dividend and Earnings Model | N/A |
If the outlier prices are excluded (Relative P/E Model), the intrinsic value ranges from $19.63 to $52.26 and has an average of $37.27. The current price of ERTS stock is $19.9. So we can see that now the stock has been underpriced.

CONCLUSION According to the evaluation above, EA is apparently a stock with an understandable business, and an effective management system. Furthermore, its current price is under estimated the valuation analysis. However, due to the unstable of a software markets, the long term prospects is hard to forecast, especially there are several powerful competitors arisen in recent years. Thus, it is recommended to observe for a while or to invest a purchase of shares of this security.

BIBLIOGRAPHY
Information about EA, Inc. http://investor.ea.com/analysts.cfm
Managerial concept of EA, http://investor.ea.com/analysts.cfm
Yahoo! Finance. http://www.finance.yahoo.com.
ELECTROINIC ARTS INC, Aril 4, 2010. ValueLine

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