Electronic Arts Tag

The Blessing of a Declining Stock Price

in Analysis

After I told my father what I am about to tell you, he called me a charlatan. He said, “You basically tell people that it is okay to lose money on their stocks.” It’s a bit more nuanced than that, but, yes, here is my message to you: When you buy the right company — one that generates enormous cash flow and is run by good capital allocators — a decline in the stock price could be a blessing, not a curse. Okay, now it’s your turn to call me a charlatan. But before you do, let me share with you two examples: one that has already played out and one that is still very actionable. In May 2012 I made the case for Redwood City, California, gamemaker Electronic Arts. My firm’s original premise in buying EA was that it looked expensive statistically, but statistics did not capture the company’s true earnings power. EA is transitioning from selling packaged games to digital ones. Digital games come with much higher profit margins; thus, even with little revenue growth, EA’s margins should go up. And they have. In fact EA’s fundamental story worked as we expected. During the third quarter of 2013, we sold Electronic Arts...

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