3 Reasons Electronic Arts Inc. (EA) Stock Still Has Game
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
When Electronic Arts Inc. (NASDAQ:EA) reported its quarterly earnings last week, Wall Street let out a collective yawn. But that shouldn’t have been too surprising to investors, who watched EA stock surge nearly 50% and knew it would take something special to send shares launching even higher from there.
Source: King of Hearts via Wikimedia (Modified)
Truth be told, there was little to quibble about in Electronic Arts’ quarterly performance. Revenues climbed by 14% to $1.45 billion
In fact, there was not much to quibble about with the performance for quarter. Revenues climbed by 14% to $1.4 billion and earnings came to $644 million, up 46%. On an adjusted basis, profits of 36 cents per share cruised past expectations for 16 cents.
A key driver has been the transition to digital sales, which represent 63% of total revenues. Electronic Arts also has enjoyed traction in efforts to boost user counts. For example, Battlefield 1 added more than 21 million players during the quarter, and the overall base for FIFA Mobile is over 95 million. NBA Live Mobile has attracted more than 70 million unique users since its first season of launch.
Still, EA stock has hit “pause” on a stellar 2017. The question going forward, then, is whether there’s more room on the upside, or if investors should start taking some profits.
I think the bull case still is very much in play, thanks to these three factors, among others:
Advantage #1: Platforms and Franchises
The gaming industry can be brutal. Just look at the prolonged struggles of mobile operators Zynga Inc (NASDAQ:ZNGA) and Glu Mobile Inc. (NASDAQ:GLUU), each of which trades at just a couple bucks per share and whose stock prices are mere shadows of their former selves.
Electronic Arts is different. It has a diverse platform with dominant positions in console, mobile and PC channels. The company has also been smart to license well-known franchises like Madden, FIFA and Walt Disney Co’s (NYSE:DIS) Star Wars. The result is high levels of customer loyalty.
Another major factor for EA stock is that the company has invested substantial amounts in new technologies. At the heart of this is the Frostbite game engine, which allows for cross-platform development across platforms for Microsoft Corporation’s (NASDAQ:MSFT) Xbox and Sony Corp’s (ADR) (NYSE:SNE) PlayStation. This system not only allows for lower costs but provides for much more realistic experiences. According to Electronic Arts:
“Games come alive with Frostbite, immersing players in deep and dynamic worlds with changing weather, adaptable cities, landscapes, and complex events.”
Advantage #2: Secular Trends
Even though the gaming industry is mature, investors can expect continued growth. Consider a recent research report from PricewaterhouseCoopers (PwC), whose analysts project that U.S. video game revenues still will grow at a compound annual rate of 6.3% through 2021, reaching about $28.5 billion.
One of the likely main drivers is virtual reality, which allows for real-life 3D experiences. True, the industry is still a work-in-progress, as seen with the challenges that companies like Facebook Inc (NASDAQ:FB) and its Oculus Rift set have experienced. PwC still thinks that the growth potential remains very attractive. Based on its analysis, the forecast is for spending to spike at 64% per year until 2021 for a total of $5 billion. Augmented reality is another breeding ground of potential.
And a company like EA has the kinds of brands and technologies a company needs to build high-quality AR and VR titles.
Advantage #3: Monetization
Another attractive facet of EA stock is the company’s multiple revenue streams. The video gamemaker has aggressively been pushing digital downloads, which not only provides stronger connections with customers but also leads to higher margins, as there is no distributor to pay.
But EA also has had lots of success with other monetization strategies, such as free-to-play, in-game purchases, downloadable content, subscriptions and game packs.
And then there’s the rapidly emerging category of e-sports, which involves competitions among professional game players … and these events can draw big viewing audiences.
There should be no surprise, then, that Electronic Arts has had little trouble cranking out cash. Cash flows came to an all-time high $1.87 billion during the past few months, and EA has about $4.5 billion stashed away in the bank.
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
More From InvestorPlace
The Future of Tesla Inc (TSLA) Stock All Depends on the Model 3
Facebook Inc (FB) vs. Alphabet Inc (GOOGL): Which Stock Should You Buy?
The post 3 Reasons Electronic Arts Inc. (EA) Stock Still Has Game appeared first on InvestorPlace.
