RICHARD DRAKE
CO-PORTFOLIO MANAGER
ABN AMRO GROWTH FUND

COMPANY: Electronic Arts
TICKER: ERTS (Nasdaq)
PRICE: $41.42
52-WEEK RANGE: $39.99-$63.12
MARKET CAPITALIZATION: $12.58 billion

Richard Drake is co-portfolio manager of the ABN AMRO Growth Fund. He is also the director of equity research and senior portfolio manager for the large-cap growth equity team of ABN AMRO Asset Management. Mr. Drake spoke with Katharine Herrup of The New York Sun about how the new game console cycle will boost Electronic Arts’s stock price.

What does the company do?

Electronic Arts is the no. 1 video game maker in the world. They develop, market, distribute, and publish video games that are played on Xbox, Nintendo, and PlayStation consoles.

Why do you like the stock?

We became interested in this stock because we believe we are in a new game console cycle, and they tend to last around five years. This one started with the introduction of the Xbox 360 in November last year and will continue with the introduction this November of the PlayStation 3 from Sony.

We like the industry because video gaming continues to gain acceptance and share of the consumer dollar. We like EA in particular because they dominate this market space. They are six times the size of Activision, which is the no. 2 company in this industry. Being much bigger, it allows Electronic Arts to spend a lot more money on research and development, and it also allows them to sign exclusive deals with the NFL, ESPN, FIFA, and the PGA with Tiger Woods. The much larger R&D budget and the exclusive deals will allow them to continue to increase their market share. These new games are going to be priced at a higher price as well – there will be a 20% increase in price.

Do you think the stock is undervalued?

We think the market tends to focus on short-term events, and the recent revenue results for EA have been a little disappointing. We focus on the long-term, and over the next two years we think there will be a dramatic revenue growth, and we think the market then will bid the price up much higher.

How do you expect the company/industry to perform going forward?

I think this industry will continue to do well and over the next three to four years will do extremely well. We think that within the very strong industry that Electronic Arts will continue to dominate and gain market share.

What’s the company’s revenue?

More than half of their revenue is coming from the United States. The revenue for the company in fiscal year 2006, which ended in March, was $2.95 billion.There are more dollars spent on video game hardware and software in the U.S than there are spent on the U.S. movie theater box office. So there’s a lot of money spent in this area of the market.

Is it a good time to buy?

I think now is probably a good time to buy this stock – expectations are low, it’s a good price basis, expectations for Xbox 360 are low as well, so no one’s really excited about it. With PlayStation 3 coming out in time for November and Christmas, we think the sales will be start being good around then and accelerating into calendar year 2007 and 2008.

What are the risks?

It’s a risky stock, it’s been pretty volatile. The stock has been weak because there have been slower than expected sales of games of the old systems, which has caused the weakness in the last six to eight months. Our focus is not on the past but in the next three to four years with this new game console cycle.

How long will you hold on to the stock?

We expect to hold onto it for at least three years, unless the price of the stock doubles overnight. We think there’s upside of the stock price anywhere from $80 to $150.