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Electronic Arts: Get in the Game

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Forget Zynga (NASDAQ: ZNGA  ) . Well, that's not hard to do after its terrible stock and revenue performance. Electronic Arts (NASDAQ: EA  ) , the company behind popular PC and console games like Madden and Mass Effect, is actually faring much, much better. They've got $1.5 billion in cash on their balance sheets and made $2.5 billion in net profits last year. EA did another $755 million in profits last quarter and they're on track for another monster year.

It's producing consistent hits

The video game industry is a hit-or-miss business. Yet, EA seems to be hitting more and missing less these days. Its flagship product, the Battlefield series, appears on track for another blockbuster release later this year. A winning streak that started with Battlefield 2 selling 1 million copies and ended with Battlefield 3 selling 8 times what Battlefield 2 did. 8 times! (8 million copies.)  .The Internet is going crazy over a recent game play trailer of Battlefield 4, its most recent installment in the series.

In addition to the Battlefield series, the company has at least five moderately to hugely successful recurring franchises: Madden, Mass Effect, Crysis, Medal of Honor and The Sims. They each sold 1.6 million  , 3.5 million , 260,000 , 650,000  and 1.4 million , respectively, in their latest releases. Not bad.

Here's the interesting thing. Except for Madden and The Sims, none of these franchises existed 10 years ago. EA seems to have a knack for consistently producing fun, immersive games that people want to play, and that hasn't seemed to let up or fall off. EA's gamers are not fickle or casual, which is actually to EA's credit, as you will soon see.

Trouble in Zynga-ville

The trouble for Zynga is it's having a tough time holding onto its user-base. In the last year, it's gone from 72 million daily active users to 39 million daily active users. Monthly active users (folks who might play once or twice a month) are down from 306 million to 186 million, a decrease of 45% and 39%, respectively, in just one year.

Remember that acquisition the company made of app developer OMGPOP and its "Draw Something" app not even 2 years ago? Well, their $180 million investment was disappointingly shuttered. Its massive loss of users has definitely hit it in the pocketbook. The company just reported a loss of $16 million for the second quarter. It's imploded from over $300 million in quarterly revenue the previous year in 2012 to $231 million. 

I'd wager the reason why Zynga is struggling to keep its users and maintain its revenue is probably due to the notoriously fickle demographic the company primarily caters to. They play Zynga games when they're bored and passing time, at work, or with recommendations from friends . An app can enjoy a fast, meteoric rise, only to face steep declines in users in favor of another more popular app because users are always moving on to next best thing. It's cyclical. This puts the pressure on Zynga and other social gaming companies even more so than companies like EA, which focus on console and hardcore gaming because hardcore gamers care less about fads and more on the mechanics and intensity of the gameplay itself.

Hardcore gaming is here to stay

Unlike Zynga, EA primarily produces games for the "hardcore" gaming market segment. Not too long ago, analysts everywhere were calling the "end" of hardcore games and the age of "casual" gaming. (They also talked about the "end" of PC gaming in favor of mobile games.) So far, we haven't seen it.

"Hardcore" games such as Battlefield continue to set blockbuster release records that rival that of major summer movies. PC gaming, for the same reasons, won't disappear anytime soon either. Hardcore games need high-end (or at least decent) computer performance. That's not coming from today's tablets or cell phones.

Activision (NASDAQ: ATVI  ) , another game maker playing primarily to the hardcore gaming segment, is enjoying a nice profitable year. It is on track to do $4.3 billion in net revenue this year, and has $4.5 billion in cash. It has its own rival franchise to EA's Battlefield series called Call of Duty and just released its Black Ops 2 installment in late 2012 doing $1 billion in sales in 15 days . It is also the company behind World of Warcraft, a popular multiplayer online game with 7.7 million subscribers at last count. At a $15 a month subscription, that is $115.5 million in revenue monthly.

Because of its cash cushion and great game lineup, Activision will probably be doing well over the next coming years; however, its flagship World of Warcraft revenue stream has been taking a great loss in subscribers to the tune of almost 2 million people since December of last year. This is probably due to player fatigue. (You can release only so many expansion packs and special quests!) Eventually people will want something entirely new and fresh and Activision will need to either come up with a way to stem its player loss on their current franchise, or come up with and entirely new one to bring its subscription revenues back up.

I believe EA stock is undervalued and that it will eventually grow to reflect its real value. Not sure where Zynga is headed, but it's not looking good for the company. It needs a hit (or two), and it needs one fast. It needs to reevaluate its core value offering, find a way to reconnect with users, and stop hemorrhaging talent.

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