Electronic Arts Inc.: Is It Time to Bet on EA Stock?

Electronic Arts StockThis Is a Game Changer for EA Stock

Top game developer Electronic Arts Inc. (NASDAQ:EA) has been getting battered on the market on rumors of weaker-than-expected sales for its much-anticipated game release of the year, Star Wars: Battlefront. EA stock, however, has remained relatively insulated from the negativity. I believe it will remain so, as EA steps up its game to expand beyond game developing.

For starters, two recent news headlines have weighed heavily on the company, making EA stock investors nervous about the company’s ability to maintain both top- and bottom-line growth. First off, NPD has released the list of the top 10 best-selling games of this season and both the top two spots were taken by EA’s competitor Activision Blizzard, Inc. (NASDAQ:ATVI). (Source: “November 2015 NPD: Call of Duty outsells Fallout 4 as PlayStation 4 takes November,” VentureBeat, December 10, 2015.)

Second, top game retailer, GameStop, has slashed the price of EA’s latest release this year, citing weak demand for the Battlefront title.

Both of these news pieces have missed a critical factor—digital sales. NPD’s data and GameStop’s forecast are both based on physical sales. But, really, who buys physical discs in this age?

More gamers are downloading titles digitally. In fact, digital sales for the overall game industry have outweighed physical sales this year. EA itself reports its sales to largely come from digital downloads now. Certainly, physical sales data is not a true barometer of the company’s success.

More than anything, what really makes me optimistic about EA stock is the company’s latest venture into online gaming and game streaming. EA has recently launched its own e-sports division to compete with its traditional rival, Activision Blizzard.

At the same time, the company will be able to keep competition from tech giants like Alphabet and Amazon.com at bay—both of which offer their own video game streaming services through YouTube and Twitch, respectively. (Source: “EA Joins the eSports Fight,” Fortune, December 11, 2015.)

Activision’s Call of Duty and Defense of the Ancients (DotA) are two of the most popular online gaming titles. The last tournament of DotA 2, for instance, was watched by more than 36 million people worldwide.

Supporting EA’s e-sports initiative is the rise of virtual reality, which is about to takeover the gaming industry as all the big tech companies are now heavily invested in this niche. Virtual reality headgear will add further fuel to the fire, driving a stronger demand for online sports, gaming, and streaming.

While the online video game streaming market is fast expanding into a lucrative revenue source, sports, hands down, take the top spot in entertainment. Electronic Arts has an edge over Activision, since it has more popular titles in the sports category. EA’s latest installments of the Madden NFL, FIFA, and NHL series have been some of the biggest revenue-pullers for the game developer in the last quarters.

Analyst Take

The video gaming industry was one of the best-performing industries in terms of sales this holiday season. Not only were hardware sales high, but even software sales for “Xbox One,” “PlayStation 4,” and “Nintendo Wii” were jointly the highest ever achieved.

This new segment will likely bring in some solid bucks for the company in addition to its traditional sources of revenue. The company is expecting this new venture to add between $0.20 and $0.30 to EA’s bottom-line numbers. (Source: Ibid.)

I wouldn’t be surprised to see EA stock soar past $100.00, as the company rolls out its new innovations.