On Feb 25, we issued an updated research report on Electronic Arts Inc. (EA).
EA has benefitted considerably from the ongoing shift from physical to digital versions of video games. The digital business is expected to remain a key driver for the company and will offset weak growth in traditional packaged-goods games.
The company expects the digital business (50% of revenues) to continue to grow in fiscal 2015 and beyond, primarily on the back of a strong mobile business. Further, the company’s exclusive partnership with China-based Internet company, Tencent Holdings Limited, will boost its digital business, especially helping it to penetrate into the Far East.
We believe that consumers are increasingly spending more on smartphones and portable devices (such as iPad) instead of the traditional devices for playing online games. As a result, mobile games have become one of the fastest growing segments in the video game market.
According to research reports, with an estimated growth rate of 42%, mobile game revenues would take over console games in 2015, representing the largest business segment for video game companies. Hence, for EA, strong growth in high-margin downloadable content (DLCs) for mobile platforms will boost top-line growth in fiscal 2015.
EA’s popularity is primarily driven by its well-known franchises. The company’s impressive pipeline of new games will augment the top line. Apart from EA SPORTS titles, the award winning new game ??? Dragon Age: Inquisition – also strengthened EA’s popularity in the video game space, further adding to the top line.
Going forward, the company expects an array of new launches that are set to hit the market in the near term. Of these, the most anticipated is Star Wars Battlefront,to be released by 2015-end, closer to the launch of the Star Wars movie this December. In addition, the company plans to launch Battlefield Hardline on Mar 17, in North America and then in Europe which is expected to attract new players for its shooter franchise.
The video game publishing industry is intensely competitive. The resultant pressure could weigh on margins and lead to market share losses. Lower volume of packaged goods sales puts margins under pressure. EA’s continued investment in the digital market may also hurt its profitability in the near term. Moreover, in an effort to enhance brand identity, the company is investing in increased promotional activity, which is expected to remain a drag on margins.
EA faces substantial competition from console and personal computer game publishers and diversified media companies including Sony, Microsoft, Nintendo, Activision Blizzard, Take-Two Interactive (TTWO), THQ Ubisoft, Disney, Time Warner and Viacom. In the mobile and social gaming market, EA also competes with Capcom Mobile, Gameloft, Glu Mobile (GLUU), Zynga (ZNGA), and hundreds of start-up companies.
Currently, EA sports a Zacks Rank #1 (Strong Buy).
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