Electronic Arts Inc. (EA): Why I’m Optimistic

Electronic Arts Inc. (NASDAQ:EA) is the second largest video-game maker in the U.S. It has released its quarterly earning earlier this month for the three months ended March 31. The business reported an 11.6% year-over-year drop in revenues to $1.21 billion, while net earnings fell 19.3% to $323 million, or $1.05 per share. The new console cycle is translating into a difficult period for companies like Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI) as consumers delay their spending decisions. Some of the decline can also be attributed to the increasing popularity of online and mobile games.

However, Activision Blizzard, Inc. (NASDAQ:ATVI) has recorded an increase in both its top and bottom-line due to the success of Call of Duty: Black Ops II, Skylanders Giants, StarCraft II: Heart of the Swarm, and Diablo III. The company’s revenues rose 13% to $1.32 billion, while net income increased by 19% to $456 million. But the business reported a sequential drop of 1.3 million in WoW’s subscribers, while online subscription sales for WoW and Call of Duty Elite dropped 9% year-over-year. In essence, the revenue growth was led by console and PC games, which reported an 85% and 384% increase in sales, respectively. In this context, the slowdown from online gaming is troubling. The strong performance of consoles in particular could show further improvements in the coming quarters (explained below).

Clearly, Activision Blizzard, Inc. (NASDAQ:ATVI) has performed far better than Electronic Arts Inc. (NASDAQ:EA), and one of the reasons, as mentioned above, was that the latter hasn’t produced as many popular franchises as Activision. From this perspective, I think that the addition of Star Wars to its pipeline is going to play out well in the future.

Secondly, I believe that Electronic Arts Inc. (NASDAQ:EA), like Activision, is a company in transition that is moving towards mobile and online gaming–hence it is witnessing a drop in console and PC revenues which is dragging on its income statement, as consoles are the single largest contributor to EA’s top-line. Its mobile revenues are witnessing impressive growth, but this unit still forms a small percentage of the overall sales. The company earns around 65% of its revenues from this segment, which fell by 13% to $790 million while PC revenues dropped by 24.6% to $252 million. But Mobile and Handheld sales rose by 40.8% to $138 million.

Thirdly, the industry is witnessing a new era of gaming following the release of the new Xbox. Therefore, things are looking better, as far as console gaming is concerned, for both Activision Blizzard, Inc. (NASDAQ:ATVI) and Electronic Arts Inc. (NASDAQ:EA). The latter has four sports franchises — FIFA, NBA Live, Madden and UFC – powered by the new gaming engine due in the coming months. For Activision, its fans are awaiting the arrival of ‘Call of Duty: Ghosts’ on the new Xbox.

The article Electronic Arts: Why I’m Optimistic originally appeared on Fool.com.

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