Electronic Arts (EA) is still a powerhouse in the video game industry even if some of its most successful gaming franchises are a bit antiquated. The past year has been challenging for video game publishers and console makers aside from Nintendo. The company’s Switch console has emerged as the trendy hardware of the year. Unfortunately, most of EA’s top titles are not available on the Switch.
Indeed, 2018 has been a lackluster year for EA. Let’s take a look at what the future might hold for this gaming power.
Take a look at EA’s stock this past summer, and you will see the price was about 45% higher than today in early 2019. This significant drop caught the majority of investors by surprise as EA’s games are still fairly popular. Furthermore, EA’s stock has steadily climbed upward across the past half-decade with no sign of slowing down. The fact that EA has succeeded in the e-Sports realm should be icing on the cake. Unfortunately, EA delayed the debuted of its much-anticipated Battlefield V game to implement some last-second alterations. This delay is important as it lowers guidance estimates, meaning EA won’t make as much money in the quarter as initially anticipated.
The company’s management indicates sales during the holiday quarter will likely be around $200 million less than the initial analyst expectations. It is certainly possible EA’s stock has some more room to decline as the video game sector is poised to heat up this winter. Activision’s new Call of Duty release combined with Take-Two’s latest Red Dead Redemption sequel will undoubtedly steal the spotlight in the months ahead.
EA executives have been pushing for additions to digital revenue streams to position the company for the inevitable shift away from the conventional brick-and-mortar marketplace dominated by the likes of Gamestop. From in-game purchases to upgrades, expansion packs and in-app niceties, there are all sorts of opportunities to enhance digital revenue. All in all, EA’s net bookings were up more than 10% this past quarter alone. Though the company’s growth in digital revenue is no longer as fast as it once was, the bottom line is people are interested in online services. Look for EA to continue to try every possible means of boosting digital revenue in the upcoming months and years ahead.
Of course, the meat of the company’s revenue will continue being its releases. EA has some absolute gems coming down its software pipeline. Its new hit, Anthem, is poised to be one of the most popular games of the new year. The Sims and the latest edition of Madden Football look quite impressive. Battlefield V is garnering excellent reviews.
As noted above, EA is tapping into every possible source of revenue for the new year. So don’t be scared away by the fact that this stock lost 24 percent of its value in October. EA will continue to rake in the digital revenue while competitors remain more reliant upon tangible, in-store sales. With each passing day, it is becoming increasingly clear gamers desire their games, upgrades and other entertainment through download or stream in a nearly instantaneous manner. EA’s steadfast intention to shift to the digital realm for game sales, in-game purchases, eSports, subscriptions and other sources of revenue certainly bodes well for the company’s future.
EA’s digital revenue has jumped from just under 50 percent of its aggregate revenue back in 2015 to two-thirds of its revenue as of January ’19. Revenue derived from traditional packaged goods has decreased more than 25 percent in this same period of time. EA’s game titles might be a bit stale to gamers who have enjoyed the hobby for several decades, yet the company has done an excellent job of positioning itself for continued growth. Look for EA to continue expanding its margins through its highly prudent focus on digital sales. The company’s gross margins will expand, setting the stage for a highly profitable 2019 and beyond.
If EA is not a part of your portfolio, do not hesitate to add it. EA’s sports title will likely continue to prove uber-popular years or even decades into the future. The company has shown it is intent on lowering operating expenses, enhancing gross margins and gracefully segueing to the digital realm to maximize profit. Add in the fact that EA has $3.55 billion in cash and there is a chance for a regular dividend. If you are not invested in EA, this just might be a fantastic opportunity to hop aboard.
Regards,
Ethan Warrick
Editor
Wealth Authority
