Gaming stocks have outperformed the entire tech sector over the last few years with the likes of Electronic Arts Inc. (EA, Financial) and Activision Blizzard Inc. (ATVI) yielding triple-digit returns. At this point in time, I favor Electronic Arts more than Activision and expect the company to continue reporting strong numbers.
In seond quarter 2016, Electronic Arts reported a loss per share of 13 cents, considerably less than the consensus of 43 cents, whereas revenue came in at $898 million. That figure also represents a surge of 10.2% year over year.
Throughout the past 12 months, the company’s revenue plunged 0.8% to $4.46 billion compared to $4.50 billion in 2015. The primary reason doe this is drop in sales of packaged games that are down 10.3 percent, as game publishers are shifting towards digital sales by removing in between dealers. While this move has had a negative impact on sales, it has been compensated by a significant improvement in the company’s margins.
The drop in packaged sales games was mostly offset by the 8.3% rise in digital sales from the previous year. On top of that, gamers are also choosing to make digital purchases in which a copy of game is downloaded to the console.
Moving onward, according to the Morgan Stanley, shift toward digital games will eventually lead to frequent and escalating user base, higher per-game engagement as well as more monetization prospects.
Not only this, Morgan Stanley also projects that the company could outperform the market on the back of gamers outlaying more money on in-game purchases. It also expects Electronic Arts’ top line to escalate at the rate of 15% per year.
Apart from this, Electronic Arts recently released the latest instalment of its most popular FIFA series, FIFA 17. Considering the robust preliminary sales of FIFA 17, it seems like it has performed much better than the last year’s edition.
One thing to keep in mind is that any kind of decline in sale from the FIFA series will considerably impact Electronic Arts'Ă‚ overall results, whereas any outperformance from the FIFA series should make a prominent effect on the top-line growth. Thus, if the initial sales trend is anything to go by, Electronic Arts is in for a great year.
Electronic Arts has also launched the annual installments of its enormously popular other sports series like Madden NFL, NBA, etc. However, as expected, FIFA will continue to take the center stage in the upcoming earnings.
Conclusion
Although Electronic Arts' revenue fell marginally last year, the company should perform way better in the imminent years on the back of stronger FIFA sales. In addition, the growth of digital sales will hugely benefit the company’s earnings, which is why I am bullish on the stock going forward.
Disclosure: I don't hold a position in the stocks mentioned in the article.
