Electronic Arts (EA, Financial) has been a terrific performer over the last few years. One might think that the company’s growth was propelled by strong demand for its games; however, its top-line growth hasn’t been mesmerizing.
A lot of factors have led to EA’s growth over the last few years, but the chief factor has been the growth of digital sales. Digital sales have slowly taken over from retail sales. This has led to a huge surge in the margins, which justifies the stock’s movement despite tepid revenue growth. The advantages from this shift, however, are about to reach peak level. The substantial shift from packaged to digital games from FY12 to FY15 led to enormous gains in the gross profit percentage.
On the other hand, revenues were almost uniform over those years, but the profit margin improved 800 basis points. This year approximation put forward flat margin growth for the entire year despite an additional 10% growth in digital revenues.
At present, digital revenue accounts for 55% of entire revenue and console games are performing much better than projected as the huge multi-player games have more importance on a platform. It is highly likely that upcoming games will move the stock even higher.
Upcoming significant products
Electronic Arts has delivered many important games in the last few years, and FIFA and Madden NFL are the most important games as they generate a major portion of revenue. The company is a key developer and publisher of PC as well as console games, and every year it introduces top-grossing games. In 2015, EA’s four games captured position in the top 10 highest selling games of the year.
The company’s "Star Wars: Battlefront" sales were driven by the launch of a new Star Wars movie and the game is considered as an increment of sorts. Madden NFL topped the expected sales for the second year in a row.
Furthermore, it will be very difficult to smash the sales figures of 2015. EA’s Mass Effect 4, Mirror's Edge Catalyst, FIFA 17 and Madden NFL 17 will be the biggest products this year.
Conclusion
Digital sales still have a lot of room to grow. While EA’s revenue may remain flat for the foreseeable future, the growth of digital sales can still boost its margins. The stock has outperformed due to growing margins and there’s no reason to believe this trend will change anytime soon.
Disclosure: I don't hold a position in any of the stocks mentioned in the article.
