EA to Pwn Peer Noobs?
Palwasha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is relaxing, it’s fun, it’s something you can enjoy with anyone. Friends, siblings or your next door neighbor, it is the best pastime on summer weekends.
Ah! This brings back some sweet childhood memories. I remember the first PC game I played back in early 90s. I was only four then. Later came the Nintendo and Sega consoles with their respective Mario and Sonic mascots. I confess that I liked the slow-paced Mario jumping about more than the swift Sonic sprinting around. Boy, those were some days!
Today Sega has lost huge chunks of its market share to other more sophisticated game developers. Nintendo may have a share in the consoles market with Nintendo Wii and the sequel of portable Nintendo DS, the Nintendo 3DS, but they haven’t had much to offer in the games market over these years. The only newer Nintendo game that I know of other than Mario that’s popular amongst kids today is Pokémon. And I am past that age.
And then came the 2000s, the age of tactical first and third person shooter games and strategy/RTS (Real Time Strategy) games. This era saw the all time popular first and third person shooter games like the Delta Force series created by privately held Novalogic (Electronic Arts holds a minority stake in it), Medal of Honor series by Electronic Arts (NASDAQ: EA), Call of Duty series by Activision-Blizzard (NASDAQ: ATVI) and Max Payne series by Take-Two Interactive (NASDAQ: TTWO). I loved and enjoyed each one equally. One simply cannot compare the single player experience of Delta Force with the multiplayer experience of MOHAA with the unique gameplay of COD with the adrenaline rushes one gets from Max Payne. This era’s famous strategy games included Stronghold Crusader, Microsoft’s Age of Empires and later the very famous multiplayer World of Warcraft by Activision-Blizzard. This ought not to be taken as a racist remark but I feel that strategy games are made for boys. I personally liked none.
Over the past decade, the number of video game players in US has increased by massive proportions. The estimated average number of hours per person spent playing video games is 142 hours for the year 2012, up from only 71 hours in 2002. The video game industry has greatly evolved over the last decade. Today it is a $64 billion industry and growing.
The industry has a good outlook for investment, both as a consumer (hardcore gamer) and also as a partner in business (shareholder). But which stock to pick out of all the industry players?
I’d pick Electronic Arts for two reasons. One, it is the largest game developer/publisher in the video game industry with a strong portfolio of popular game franchises. Two, it recently completed its share buyback program yet is trading around its 52 week low.
Contrast this with peer Activision-Blizzard which is the second largest game developer/publisher and is trading in mid of its 52 week range. Not to forget, its price is likely to slump if Vivendi decides to sell its $8.1 million stake in Activision-Blizzard, as recently indicated by Vivdendi’s chairman. Further, compare basic financials of EA with its three peers below and you’ll only agree with my pick.
Past years have been hard for EA. Activision reported better results for the last two years. But this and coming years may have something positive in store for the company. EA was able to generate the highest cash flows from operations in the most recent quarter against its peers.
EA has a lower current and forward PEG and forward P/E multiple than Activision and Zynga. Take-Two Interactive has the lowest PEG and P/E but its EV/EBITDA is negative. I used the current P/CFO ratio instead of current P/E because it's not so easily manipulated by management as P/E multiple. EA also has the lowest P/CFO multiple (Take-Two has a negative P/CFO--not good!). That brings up EA as the best candidate to buy.
Demographics brought to advantage!
According to a survey last year, 55% of gamers (more than half of total) play games on their phones or handheld devices which may include iPhones, iPads, Androids, Sony PSP, Sony PSVita, Nintendo DS and 3DS. With the iPhone and Android smartphones market fast eroding market share of other handheld devices and even consoles, it is hard to imagine a game developer that completely dismisses the smartphones market.
Ladies and Gents, I present to you Activision-Blizzard! Please, give them a big hand (on their face). Activision’s CEO doesn’t see the iPhone/Android market as really being an opportunity for them to grow and so they don’t publish any games for smartphones. At all! Believe it or not! On the other hand, Electronic Arts holds an edge over its competitors with a wide portfolio of games for smartphones including but not limited to Poker, FIFA, Need for Speed and Monopoly. Take-Two Interactive’s Grand Theft Auto (GTA Chinatown Wars) is available on iPhone with two other games but that’s pretty much it. Zynga (NASDAQ: ZNGA) has numerous games for iPhones and Androids but none for gaming consoles. Their product line is limited to mobile phones and social networks.
Electronic Arts also provides games on social networking sites like Facebook. EA has 49 million monthly active users (MAU) in social games as of March 2012. Electronic Arts also caters to women who, according to the same survey as above, make up 42% of the gamers’ world. The Sims series and EA’s games on Pogo are equally loved by women.
Waiting to be pulled out of the hat!
We’ve got some sick EA games coming this year. Lined up for release in September are The Sims 3 Supernatural and FIFA 13. October is going to be one heck of a month for us, gamers. Releasing in October are Medal of Honor Warfighter and Need for Speed: Most Wanted.
Bottom line: Grab the shares while you can!
And will somebody pass me my joystick already!
PalwashaS 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.