What Makes Electronic Arts Inc. (EA) a Buy?

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Electronic Arts Inc. (NASDAQ:EA) is a gaming company based in the U.S. that has exhibited solid growth lately. The company’s stock grew 17% after its fourth quarter results were announced, representing its biggest jump since December 2000. Its stock price has appreciated 48% this year relative to a 14% gain witnessed on the Standard & Poor’s 500 Index. The company posted such exceptional results primarily due to control in its cost structure and a shift in its strategy from retail to the digital platform.

Electronic Arts Inc. (NASDAQ:EA)

The entire gaming industry is experiencing a massive shift towards the digital platform at the moment. Hence, there is a noticeable increase in overall revenues generated through this platform. The decline in sales of consoles remains a serious concern for the gaming industry, however. It is imperative for potential investors to comprehend these shifts in the gaming industry in order to make the right investment choice.

Evolving trends in the gaming industry

The most noteworthy change in the landscape of the gaming industry is its shift from retail to the digital platform. Electronic Arts Inc. (NASDAQ:EA)’s digital revenue, from mobile games and online offerings, increased 45% year-over-year to surpass the $600 million mark. Going forward, sales of PC games are expected to increase at a rapid pace and bolster the digital platform. Similarly, the company’s foray into social networking through games such as “The Sims Social” is also expected to prop up sales in the future.

Digitization in the gaming industry has resulted in traditional platforms such as consoles competing with smart phones, tablets, social networking sites and online browser games. This has led Electronic Arts Inc. (NASDAQ:EA) into shifting its focus completely onto the new emerging gaming platforms.

According to valuation offered by Trefis, the company’s mobile division contributes 9% to its overall stock value. It is worth mentioning that mobile revenues grew from $164 million during 2009 to $308 million in 2012, which is indicative of a major trend shift for the gaming industry.

The company has successfully integrated its Origin game service with the mobile platform, enabling it into offering mobile versions of the company’s popular games. Furthermore, Electronic Arts Inc. (NASDAQ:EA)’s “The Sims Social” has witnessed a remarkable response on the social networking platforms and has surpassed competitors such as “Farmville” in terms of average daily users.

Key value drivers

Electronic Arts Inc. (NASDAQ:EA) is in a transitional phase, shifting gradually towards mobile and online gaming. This will certainly impact the company financials, as revenue generated through traditional sources such as consoles are the highest contributor to its net income. Nevertheless, the rapid growth experienced through the mobile platform will certainly offset for any decline. Moving ahead, EA must shift its focus to games with lower research and development costs and fewer administrative expenses such as the “FIFA” and “Need for Speed” franchises.

Furthermore, it is essential for Electronic Arts Inc. (NASDAQ:EA) to recognize that massively-multiplayer online games (MMOGs) have become extremely popular. In addition to offering high margins, these games also enable lower incremental spending for services offered to paid subscribers.

Competitive landscape

Activision Blizzard, Inc. (NASDAQ:ATVI) is the one of the largest players in the gaming industry. The company is strategically investing in new mobile and social gaming projects with an aim to maximize its revenues through non-traditional sources. The aggressive growth realized by Activision Blizzard, Inc. (NASDAQ:ATVI) is through the success of popular games such as “Call of Duty” and “World of Warcraft.”

The company has a diverse range of revenue streams. It generates the highest percentage of its revenue through sales of games for consoles at around 45%, which is followed by PC, mobile and social gaming at around 25%. The remaining revenues are split between online subscriptions, handheld games and distribution. Despite the industry-wide drop in the sales of console games, Activision Blizzard, Inc. (NASDAQ:ATVI)’s stock has appreciated approximately 40% since 2013. The company is well positioned to absorb any headwinds caused by the decline of consoles as it is posting robust numbers through the new emerging platforms.

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