I have been bullish on gaming stocks ever since the market started recovering in February. While Activision (ATVI, Financial) was my favorite pick from the sector, I also recommended buying Electronic Arts (EA, Financial). Both the stocks have performed well since my recommendation, but I think Electronic Arts still has more upside to offer.
Strong First Quarter
Electronic Arts delivered a strong first quarter, as the company shared earnings per share of seven cents, beating analysts’ estimates by two cents. The company’s revenue came in at $682 million, $31.34 million higher than the consensus.
The company detailed that its digital transformation was the primary driver behind its growth. In terms of HD platforms, the company comprises of prosperous communities in its foremost franchises, and these will endure to grow as it introduces superior new games this year.
Through the quarter, over 11.5 million and 6.6 million players played Battlefield titles and Star Wars Battlefront, respectively. These stats clearly suggest that both the games are performing well and engaging players over time.
Turning towards the mobile business, the company is observing growth across multiple genres. For instance, Madden NFL Mobile monthly active players list surged an additional 25% in first quarter year-over-year and 37% more game sessions in the same duration.
Growth Is Not Over Yet
As a matter of fact, the sales prospect of Electronic Arts’ key titles this year is very exciting. Though Star Wars Battlefront disputably signifies a tough comp, Battlefield 1 could delivera similar performance this year.
Moreover, Star Wars Battlefront could endure to be a chief contributor to the top-line via the sale of digital content and the launch of a VR supported version of the game.
Apart from these, key titles this year comprises Titanfall 2, Mass Effect and Mirror’s Edge, whose sales prospective is much better than Need for Speed and UFC 2. The company anticipates that Mass Effect and Titanfall 2 could ship in the range of 5-10 million units each, compared to 2-3 million units on average for the previous year’s games. All in all, the company’s key titles could ship 12-13 million more units compared to 2015 and produce around $500 million of additional revenue.
Conclusion
Electronic Arts has been growing at a rapid rate over the years and I expect the company to continue growing through its transformation. As a result, I am still bullish on the stock and believe it has about 15% more upside potential.
Disclosure: I don't hold a position in any of the stocks mentioned in the article.
Start a free 7-day trial of Premium Membership to GuruFocus.
