Why Electronic Arts still has Room to run Higher
In the first quarter of fiscal 2014, Electronic Arts' revenue came in at $495 million. This was not only better than the year-ago quarter's revenue of $490 million, but also significantly ahead of the consensus estimate of $460 million. This increment was primarily fueled by the robust sales of titles like Battlefield 3, FIFA 2013 and Star Wars: The Old Republic.
Electronic Arts' earnings didn't match the increase in its revenue as the company posted a loss of $0.40 per share. This was marginally better than the prior year quarter's loss of $0.41 per share and way better than analysts' estimate of a loss of $0.65 per share. The underperformance of EA's publishing and distribution segments was the reason behind this loss. However, the 16.7% year over year increase in the revenue generated by the company's digital segment compensated for it.
Electronics Arts is aggressively moving into the lucrative mobile gaming market and is planning to release 15 new mobile games next year. It recently released Plants vs. Zombies 2 on iOS and it witnessed a record 15 million downloads in just five days. Given the brand's popularity, it is expected that the impending launch of the new mobile games will have a positive effect on the company's revenue.
EA's target for 2014 is to arrest the sales drop that usually accompanies any new console launch. Millions of players across the world will make the transition to next-generation consoles. The company will launch numerous new titles to support the next-generation consoles while servicing consumers using the current generation consoles.
To achieve this, EA is planning to launch many of its blockbuster titles like FIFA 14, Madden NFL and Battlefield 4 for the current generation of consoles before the end of the present quarter, while the updated versions of these titles will be released in the next quarter.
EA has also authorized a $500 million share buyback, which signifies that the company is firm on its objective of returning value to its shareholders. In addition to that, the company is also targeting the massive Chinese online gaming market and has tied up with Tencent. It is planning to launch online versions of its most popular games like FIFA and Battlefield.
Electronic Arts has officially declared that it will go entirely digital in the near future, which means that physical copies the company's games will no longer be sold. A move like this may take time but it has dual benefits. Firstly, as the digital copies of the games can't be resold, it will increase its sales and it will also save the company money as it won't have packaging and shipping costs to contend with.
A fight on its hand
Activison Blizzard (NASDAQ:ATVI) is one of EA's major competitors. It has performed consistently over the years but its recent second-quarter results were disappointing. It recorded a 42.5% drop in revenue to $608 million. The company's EPS also plunged from $0.20 to $0.08 per share, but exceeded analysts' estimate of $0.06. The significant dip in the year-over-year sales of its best-selling title, Diablo III, was the primary culprit behind this dip.
Like EA, Activision has also struck up a partnership with Tencent and is planning to launch an online version of Call of Duty as it hopes to gain traction from the huge Chinese gaming market. Also, the company has launched Diablo III for Xbox 360 and PlayStation 3 and given the robust performance of this title in the prior year, a similar performance in the future won't be surprising.
In addition to that, Activision has agreed to spend $5.8 billion in order to buy back its shares from Vivendi, which will make it an independent company once again. The company looks set to make the most of the impending console cycle and has also increased its marketing budget to challenge its competitors.
Take-Two Interactive (NASDAQ:TTWO) is another contender for gaming dollars. However, its recent results were also below par as the company posted a loss of $62 million. But this signified a noteworthy improvement as the company had posted a loss of $111 million in the corresponding quarter of the previous year.
Take-Two has performed inconsistently since 2007, but analysts expect that the upcoming launch of titles like Grand Theft Auto V, NBA 2K14 and WWE 2K14 will power its share price higher.
The company is of the opinion that Grand Theft Auto V will be the biggest and most dynamic open-world game that it has ever developed. Take-Two has also decided to release an online version of this title which resonates with the trend of player-generated content. The company has made an attractive addition to this franchise which will give the players access to an in-game editor, permitting them to create content and share it with other players.
Electronic Arts plies its trade in an industry where it has to compete with illustrious players. However, the company's strategy of catering to both the incoming console generation and the outgoing one looks good. Also, EA's focus on mobile and the fact that it can use its popularity in PC and console games to bring over gamers to its mobile platform is yet another positive. So, even after a rise of around 95% this year, Electronic Arts still has enough catalysts to go higher.