Electronic Arts in Good Shape After Adjusting Its Strategy

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Electronic Arts (NASDAQ: EA) has been favored by the market this year. The stock is up 50% year-to-date. Its peers, Activision Blizzard (NASDAQ: ATVI) and Take-Two Interactive (NASDAQ: TTWO), have enjoyed gains of 39% and 40%, respectively. The industry has gained momentum, but would this momentum continue as we head into the second part of the year?

Strategy

Games are played on three main types of devices – consoles, PCs, and mobile devices. Mobile games are the fastest growing part of the market because of the shift to mobile around the world. In this environment, Electronic Arts states that it is focused on bringing as many titles as possible across all devices so that players can interact with its products from various platforms.

The company recently reiterated its fiscal year 2014 revenue guidance of $4 billion. Electronic Arts is going to narrow its focus and concentrate on the best-performing franchises, while carefully selecting new titles. The company is famous for its sports simulators, including Madden NFL, FIFA, FIFA Manager, NBA Live, and NHL. The jewels in the product crown are Battlefield and the Sims series. What does concentration on franchises mean from the financial point of view? It means that the results would be more predictable. It also means there is less opportunity for explosive growth created by a previously unknown title.

Electronic Arts states that it is moving to games-as-a-service as its business model. It means that every game issued would have a service component in it. It expects this model to defer some revenue at the beginning. However, the company cares more about the game’s lifetime revenue than up-front sales. During the latest analyst call, it hinted that FIFA 14 will be free-to-play on mobile, in line with this strategy.

Competition

The competitors also heavily rely on franchises. Activision Blizzard publishes World of Warcraft, the massively multiplayer online game that has conquered the hearts of millions of gamers. Lately, the number of active subscribers for this game has been falling. During the first quarter, subscribers declined by approximately 1.3 million, which accounted for 14% of total subscribers. The company believes that a further declined would occur, and that it will end the year with fewer subscribers than it has today.

Take-Two Interactive relies on the success of series like Bordelands, Grand Theft Auto, and BioShock. The strategy of the company is common to the entertainment industry: take everything you can from your franchises while accurately trying something new. The company is projected to overcome recent loses and to finish the year with profit.

Autumn releases

Autumn is always a hot time for the industry, but this year, it would be even more special than ever because new generation consoles would hit the market. At first, the impact would not be seen on the income statements. It takes time for gamers to perform the transition. After initial months, the impact would start to grow, so the success of the newest games would be crucial.

Electronic Arts would release Battlefield 4 at the end of October. In addition to that, all sports series would be issued. Activision Blizzard would greet autumn with its newest Call of Duty: Ghosts. The previous releases of the franchise have sold very well, and this one is highly anticipated too. Take-Two Interactive places its hopes on Grand Theft Auto V, which is due in September.

Bottom line

Electronic Arts is trading at a 15.48 forward P/E, while Activision Blizzard trades at 14.34 forward P/E and Take-Two Interactive trades at 14.31 forward P/E. Activision Blizzard is the only company of these three that pays a dividend that yields 1.30%. The transition period between old and new consoles could slow down the industry's growth for a while. Electronic Arts looks like the autumn winner, with its sports franchises and the Battlefield release. Moreover, the new service strategy could pay off big when gamers pay for additional perks and features. 

While Activision and Microsoft have been taking the headlines when it comes to console gaming, Fools following the gaming sector would do well to also keep tabs on Electronic Arts. The Motley Fool's new special report breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now.


Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Take-Two Interactive . The Motley Fool owns shares of Activision Blizzard. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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