OK, so we don't own a video-game console in the Beyers household. Maybe I'd be more bullish on Electronic Arts (Nasdaq: ERTS ) if we did, but I don't think so.
What a load of ...
Why? Blame John Madden. My favorite football commentator also happens to be the brand behind EA's most popular video game, the annual Madden series. And when I say popular, I mean really popular. There's both a Madden Challenge, in which thousands of players compete in a global tournament for a $100,000 top prize, and a Madden Bowl, in which current NFL players go head-to-head in a single-elimination tournament during Super Bowl weekend.
I'd call it crazy if I weren't jockeying for position in a 12-team fantasy football league here in suburban Colorado. (Team name: Fools in the Backfield. Pinkie swear.)
But Madden's popularity also speaks to the problem with EA. Can you name even one non-sports game that it produces?
Talk about a one-hit wonder.
Are those shoulder pads in season?
Some businesses do great selling one thing and one thing only. Take Research In Motion (Nasdaq: RIMM ) . All it sells is the BlackBerry smartphone. That's worked out pretty well so far.
But it isn't easy to replicate the BlackBerry. Patents protect it. What's protecting EA? How about nothing? And that stinks, because gamers are fickle, like Carson Kressley during Fashion Week. No, you won't hear high-pitched screams of "Oh, my gawd" coming from your living room, but you might hear a controller tossed to the side and -- gasp! -- your bored child heading outdoors for a gulp of fresh air.
More of that appears to be happening with EA, for which you can thank Sony (NYSE: SNE ) . Its $600 PS3 game console proved to be the ugly kid when compared with Nintendo's wildly popular Wii. So, when EA backed Sony big, as it did with the PS2, sales and revenue suffered.
Allow EA to tell you why this isn't a small problem. Quoting from the most recent 10-K: "Video game hardware systems have historically had a life cycle of four to six years, which causes the video game software market to be cyclical as well." (Emphasis mine.)
Translation: Come and see us in 2012.
Show me the numbers
None of this would be so bad if EA were trading for a discount. After all, it's still the leader in mobile gaming. And rival Take-Two Interactive (Nasdaq: TTWO ) left an opening by failing to make Grand Theft Auto IV available during the upcoming holiday season.
Yet this stock is anything but cheap. Assuming, as Wall Street does, that EA improves earnings by roughly 19% per year over the next five years results in a PEG ratio of 2.45. Undervalued stocks tend to trade for 1.0 or less. Or at least no worse than 1.5, as Activision (Nasdaq: ATVI ) does.
The Foolish bottom line
EA blew it by not backing the Wii more heavily. Now Rick wants you to forgive this mistake and accept that a brighter future is beyond the horizon.
Here's my advice: Accept an apology only when it comes on the cheap. Right now, EA isn't. And it's just one of many that will profit from the soda-swilling, couch-planted, ever-growing swollen-thumb brigade that is today's gaming subculture.
Your portfolio can do better.