Is Electronic Arts A Touchdown?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Electronic Arts (NASDAQ: EA) recently released the latest version of its Madden NFL franchise game. The update, known as Madden NFL 13, was more than just a roster update according to EA. The game featured a revamped physics engine and a new career mode option. Electron Arts announced on Thursday that it sold 900,000 copies of Madden NFL 13 on its first day of availability, representing a franchise record. The same day the company’s stock rallied mildly on a down day. Over the past year Electronic Arts' stock has fallen over 40.97%, vastly underperforming the S&P 500, which has rallied 15.40% over the same period. The company employs 9,000, and is valued at $4.24 billion on the New Stock Exchange. So is Electronic Arts a touchdown, or is the company fumbling the ball?

<img src="" />

Fluctuating Fundamentals

In 2010, Electronic Arts reported earnings per share of -$2.08. In 2015, the average analyst consensus believes the company will derive $0.63 per share from its business operations. This represents a 130.29% increase in earnings over the course of a half decade. While it encouraging to see that Electronic Arts' earnings is projected to be positive in 2015, it is noteworthy to note that the company’s earnings per share drifts from positive to negative and back again during this period. The top line of EA’s business is much more stable than its bottom line. In 2010, Electronic Arts reported sales of $4,159 million. In 2015, the street anticipates the company to derive $4,589 million in sales from its business operations. Based on these statistics, Electronic Art’s compound annual growth rate (CAGR) is 1.99%, a sustainable rate that is on the slower side of the growth spectrum. At no time in Electronic Arts' history as a publically traded company has the stock paid out a dividend, and has expressed no plans to do so in the future.

The chart below displays Electronic Arts' sales, operating profit, net income, net margin, operating margin, and earnings per share over the coming years.

<img src=",2,605,375,Electronic+Arts+Inc./29315/2/Income+Statement+Evolution.png" />

<img src=",2,360,280,Electronic+Arts+Inc./29315/2/EPS+Dividend.png" />

The Mobilization of the World

As each day, hour, minute, and second passes the world becomes more mobile. Mobile platforms offer numerous advantages over the conventional desktop platform. For one it is mobile, the devices can be transported to anyplace in the world. Another advantage is the portability of the objects, as they are usually lighter and easier to carry. There is no denying the cold-hard facts on the wall. Mobile is the future of nearly every industry that can be mobilized. The gaming industry is one of these industries. The hefty and bulky Xbox 360s of today will soon be traded in for Xbox portables that have all the power of the original, yet are portable and smaller. Electronic Arts currently derives the majority of its revenue from games sold that are compatible with these hefty consoles. Many of their games are offered on the Apple app store and Google app marketplace, yet the $5 games for the iPhone or iPad are not nearly as rewarding as the $60 games for the Xbox. As the chart below displays, traditional video game sales have plummeted, and will continue to do so in the future, as the customers no longer find $60 games for bulky non-portable consoles unattractive.

<img src="" />

If Electronic Arts is to remain competitive and relevant in the future, the company will have to focus more of its resources on games for smartphones, as the more powerful the software becomes, the more complex games they will be able to support. EA will have to make its games on these platforms more profitable. Electronic Arts must focus and invest heavily in its games on mobile platforms in the future, possibly acquire a company such as Zynga yet smaller, if it is to remain a factor in this industry.

Who Is the Industry Trailblazer?

Compared to some of Electronic Arts' most prominent competitors, such as: THQ (NASDAQOTH: THQIQ), Activision Blizzard (NASDAQ: ATVI), Take-Two Interactive Software (NASDAQ: TTWO), and Zynga (NASDAQ: ZNGA), Electronic Arts compares relatively moderately favorably.

<table> <tbody> <tr> <td> </td> <td> <p>2009-2014 EPS Growth</p> </td> <td> <p>Current Dividend Yield</p> </td> <td> <p>2009-2014 Dividend Growth</p> </td> </tr> <tr> <td> <p>EA</p> </td> <td> <p>130.29%</p> </td> <td> <p>0.00%</p> </td> <td> <p>0.00%</p> </td> </tr> <tr> <td> <p>THQI</p> </td> <td> <p>190.77%</p> </td> <td> <p>0.00%</p> </td> <td> <p>0.00%</p> </td> </tr> <tr> <td> <p>ATVI</p> </td> <td> <p>1,144.44%</p> </td> <td> <p>0.00%</p> </td> <td> <p>0.00%</p> </td> </tr> <tr> <td> <p>TTWO</p> </td> <td> <p>-44.00%</p> </td> <td> <p>0.00%</p> </td> <td> <p>0.00%</p> </td> </tr> <tr> <td> <p>ZNGA</p> </td> <td> <p>94.29%</p> </td> <td> <p>0.00%</p> </td> <td> <p>0.00%</p> </td> </tr> <tr> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td> </td> <td> <p>Price/Earnings Ratio</p> </td> <td> <p>Price/Earnings/Growth Ratio</p> </td> <td> <p>Net Profit Margin</p> </td> </tr> <tr> <td> <p>EA</p> </td> <td> <p>70.80</p> </td> <td> <p>0.63</p> </td> <td> <p>1.83%</p> </td> </tr> <tr> <td> <p>THQI</p> </td> <td> <p>-0.17</p> </td> <td> <p>1.15</p> </td> <td> <p>-29.19%</p> </td> </tr> <tr> <td> <p>ATVI</p> </td> <td> <p>16.60</p> </td> <td> <p>0.79</p> </td> <td> <p>22.48%</p> </td> </tr> <tr> <td> <p>TTWO</p> </td> <td> <p>-4.12</p> </td> <td> <p>0.49</p> </td> <td> <p>-13.04%</p> </td> </tr> <tr> <td> <p>ZNGA</p> </td> <td> <p>-3.84</p> </td> <td> <p>-0.69</p> </td> <td> <p>-35.46%</p> </td> </tr> </tbody> </table>

In terms of growth, Activision is the industry leader, while Take Two Interactive is the industry laggard. No companies in this industry pay out dividends and none have expressed any plans to do so in the future. In the fundamental ratio comparison, Activision is the most reasonably priced, while Electronic Art trades at a premium to its peers. The opposite is true when growth is taken into account. In the net profit comparison, Activision stands out the upside, while Zynga stands out to the downside.  

The Foolish Bottom Line

Electronic Art’s release of Madden NFL 13 was a huge success, but it will not be long, maybe for Madden NFL 20, until the game will be played completely on smartphones. Large bulky consoles not only take up a lot of space and energy, but also are not mobile. Mobile gaming is undeniably the future of the industry, and to remain dominant Electronic Arts will have to focus on this segment. The company has a fluky bottom line, but is top line is stable and growing. Compared to its peers, EA compares relatively favorably. The foolish bottom line is that Electronic Art is more of a fumble than a touchdown in my view, but may find success in the future on its mobile platforms.   

makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard and Take-Two Interactive . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus