Microsoft Corporation (MSFT)’s Entertainment Segment Wins at E3

Electronic Arts expects gross margin improvements

The company reported weak earnings result for the first quarter of 2013 because demand for console games is likely to decline in anticipation of next-generation games. This is a seasonal trend and is likely to be temporary. The company trades at a 73.8 earnings multiple because analysts anticipate substantial earnings growth once the negative carry-over effect of a console transition are through.

For now, developments in the console space are allowing Electronic Arts Inc. (NASDAQ:EA) to give off some strong guidance in terms of cash flow (which is expected to grow by 23.45%). This is mostly driven by declining gross margin (the improvement in gross margin is driven by digital downloads which will lower distribution costs i.e. Cost of goods sold).

Analysts anticipate the company’s release of next generation games paired with the declining cost of goods sold to lead to substantial growth rates in earnings. Analysts believe that the company will grow earnings by 40.5% for the current fiscal year and 19.50% growth in the 2015 fiscal year ending in March. The company’s growth may experience even greater upside if holiday sales of both the PlayStation 4 and Xbox One beat analyst expectations.

Conclusion

Microsoft Corporation (NASDAQ:MSFT)’s entertainment division was able to grow earnings 56% year-over-year in its latest quarter. The growth in sales must be sustained in order for Microsoft to offset the decline in Windows license sales that is anticipated for the rest of the calendar year.

Microsoft Corporation (NASDAQ:MSFT) has been able to grow Xbox’s market share to 44%, and it is likely that Microsoft will try its best to fend off competition in the console space. The company’s line-up of Microsoft Windows 8 tablets may, at some point, become fully integrated as an alternative console controller leading to further upside in mobility sales.

What’s keeping Microsoft Corporation (NASDAQ:MSFT)’s stock price grounded is the growth in entertainment and mobility, services, and servers. The company cannot afford a slip-up in any of these segments as the company is running on three cylinders out of four to generate growth.

Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard, Inc. (NASDAQ:ATVI) and Microsoft Corporation (NASDAQ:MSFT).

The article Microsoft’s Entertainment Segment Wins at E3 originally appeared on Fool.com.

Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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