Morgan Stanley analyst Brian Nowak materially raised Electronic Arts' cash flow expectations and increased its price target to $126 from $114 to reflect accelerating digital download trends. Nowak said the shift to digital is a secular tailwind given game downloads have approximately 20% higher margins than physical sales and extra content has margins that are even higher. The analyst expects downloads to increase 45-50%+ in the next 5 years versus 30% today and extra content to increase as well. Nowak forecasts gross margin expansion of 79% by FY22 from 75% in FY17 and said the increasing pool of higher-margin digital dollars enables the company to invest more for continuing development. The analyst views shares as undervalued relative to cash flow growth and reiterates his Overweight rating.

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