Video Game Companies Are Hitting New Highs?

Electronic Arts (NASDAQ: EA  ) hit a fresh 52-week high this week.

It's not alone. Larger rival Activision Blizzard (NASDAQ: ATVI  ) also hit a new 52-week high last week.

The newfound investor admiration comes at a surprising time. Video game sales have been sputtering for three years, and video game retailer GameStop (NYSE: GME  ) has hosed down its same-store sales outlook four times over the past year. It also didn't help that November's launch of Nintendo's Wii U -- the first new console in years and a long-awaited catalyst to breathe new life into the moribund industry -- is off to a disappointing start.

EA's recent financials also aren't exactly encouraging.

The video game pioneer's holiday quarter was a dud. Last month's quarterly report saw adjusted revenue decline 28% to $1.2 billion, falling short of its earlier guidance. Adjusted net income tumbled 47% to $176 million.

There will be quarterly lumpiness at any video game publisher, but even if we look out at the trailing 12 months we see adjusted revenue slipping and adjusted profitability cut by more than half.

It's not all bleak for EA. Digital revenue is up nicely, and EA was the top iOS publisher in 2012. FIFA 13 has sold more than 12 million copies through the end of December, and Battlefield 3 Premium is off to a strong start with nearly 3 million subscribers.

However, the real reason to get excited about EA is the future. There are some favorable trends working in the favor of software companies including EA that will play out in the coming months.

Reports last month indicate that Microsoft's (NASDAQ: MSFT  ) next Xbox system will incorporate activation codes on software installations that will prevent used games from being passed along. This is bad news for GameStop and other retailers that rely on trade-ins and resales, but it's promising news for the software companies that never profited from the secondhand sales and trades.

Sony's (NYSE: SNE  ) PS4 had similar rumors circulating, but that wasn't highlighted during a Feb. 20 unveiling event. However, the PS4 runs on a new chip that won't be compatible with earlier PlayStation games. This should stimulate initial sales of new software. Sony is also playing up the chunky hard drive storage capacity of the new system and a streaming service, and these are things that bode well for EA's digital initiatives, where margins can be pretty generous.

Naturally, it will be up to the diehard gamers to make this work. If the software developer-favoring features of the new Xbox and PS4 aren't received well by the public the industry will be in for another year of shrinking sales. However, EA's ability to milk more out of a stagnant and possibly declining market is enough to make EA investors the wealthiest that they've been all year.

The game continues.

It's in the game
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. We can help. Our 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.


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