Electronic Arts Inc. (NASDAQ:EA)’s gross margins are quite healthy at 74.4% in the fourth quarter, resulting in net revenue of $1.209 billion overall and net digital revenue of $453 million. Its most notable success is that for the first time in its 31 year history, it expects to be able to weather a hardware transition with flat costs but increased revenues. It intends to increase profits conservatively by streamlining the business with less of a focus on aggressively expanding its business through increased intellectual property and geographic expansion (EA).
Not All Doom and Gloom
Activision Blizzard, Inc. (NASDAQ:ATVI) and Electronic Arts Inc. (NASDAQ:EA) have two main potential upsides to this mobile transition. First, the gaming industry goes through hardware updates every couple of years. Thus, these companies have acquired a great deal of experience weathering the various transitions, and they have the cash balances to do so again. Unlike new entrants into the market, they know how to take a game and modify it so that it is still enjoyable and can be easily played on a new system. In the past, they had provided content to multiple different platforms and so have experience working and, in many cases, porting the games to the various platforms.
The other upside is even larger. The rise of smartphones causes significant reduction in revenues in the video gaming and PC gaming sectors. In the developed world, this means the net effect of increased mobile revenue to be severely muted. However, in the developing world such as India and China, video gaming and PC gaming had never achieved many sales in the first place. However, many places in the developing world are seeing vast increases in mobile use, thereby opening up huge new markets for content providers such as Activision Blizzard and Electronic Arts Inc. (NASDAQ:EA). Also, digital sales tend to have very high margins, suggesting a strong potential for increased profitability on the part of successful companies.
Risk
| Activision Blizzard | EA | |
| Betas | .71 | 1.04 |
The end story is simply that the rise of smartphones and tablets has severely disrupted the means by which consumers play games. This has large implications for both the providers of the mobile devices, such as Apple, and for the content providers.
Furthermore, the increasingly hit-driven nature of the industry has independently driven up the risk in the two companies. Although, neither of the companies Betas are very high, Activision Blizzard, Inc. (NASDAQ:ATVI)’s Beta is .71, while Electronic Arts Inc. (NASDAQ:EA)’s Beta is 1.04, the overall risk resulting from being in the industry is far higher. However, both companies are in a good position to handle that risk because of their large cash balances and history of making hardware transitions. Furthermore, because mobile opens up huge markets both in the developed world, and more importantly in places such as India and China. Therefore, these gaming companies are playing a riskier game with real potential for both loss and gain.
The article Gaming Companies Playing a Riskier Game originally appeared on Fool.com and is written by Paul Sangrey.
Paul Sangrey has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard, Amazon.com, Apple, and Google. The Motley Fool owns shares of Activision Blizzard, Amazon.com, Apple, and Google. Paul is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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