Electronic Arts’ Titanfall Is a Big Deal

Like the gamers impatiently awaiting Titanfall's release, investors should share a similar enthusiasm.

Mar 5, 2014 at 9:00PM

Microsoft (NASDAQ:MSFT) and Electronic Arts (NASDAQ:EA) announced a promotional $500 Xbox One Titanfall bundle, which is a great deal for consumers, as $500 is the same retail price as the stand-alone Xbox One. This arrangement should add a nice tailwind to Xbox One console sales and help expand Titanfall's attach rate. The bundle will be available to consumers on March 11.

Michael Pacther, video game analyst with Wedbush Securities, stated in early January that he believes Electronic Arts will sell between 6 million-10 million copies of Titanfall, depending on the game review scores. "If it gets above a 90, it will likely be at the high end of that range, below an 80, at the low end," Pacther said.

Since then, a beta testing of Titanfall was played by over 2 million unique users, according to the developer, Respawn. Initial reviews have been extraordinarily positive.

Cnet's Jeff Bakalar has covered video games for more than five years, and in his review he wrote, "to the average gamer, Titanfall will likely be the closest feeling of 'next-gen' they'll have on an Xbox One for the foreseeable future."

How does Microsoft fit in to this?
Gregg Moskowitz of Cowen & Company asked Microsoft management to clarify why Xbox platform revenue grew $1.2 billion year-over-year in the second quarter, but at the same time related cost-of-goods-sold rose $1.6 billion.

Amy Hood, Microsoft's Chief Financial Officer, said that Microsoft is still in "launch mode" for the Xbox One and will continue to expand markets over the course of the year, implying the company could likely see costs exceed revenue in the near term.

Hood added that "many people are excited about the launch of Titanfall in March, and we'll continue to add and expand markets over the course of the year. So, I would continue to think about our investment in being the leading next-generation console as certainly extending."

Microsoft is also using its Xbox platform to demonstrate the power of its cloud computing services. Abbie Heppe, Community Manager at Respawn said: "We are one of the first games to take advantage of Xbox Live Cloud and have engaged in throughout the world to provide a consistent and incredible experience for players servers. Of course we also make some of our calculations of artificial intelligence through the cloud, and all this just promoting our game."

Microsoft's heavy investments in exclusive deals places Xbox One at a tremendous advantage when factoring in the growth trajectory of video game sales. According to PWC, consumer spend on video games over the next five years will increase at a compounded annual growth rate of 6.5% to reach $86.9 billion in 2017, up from $63.4 billion in 2012.

If demand proves to be as strong for Titanfall as expected, consumers have no choice but to purchase an Xbox One to be able to play the game.

Will GameStop be left in the dark?
Holiday season sales for GameStop (NYSE:GME) were disappointing, with new software sales down 22.5% year over year. Rumors that both Microsoft and Sony are prepping diskless consoles are causing some investors to wonder if GameStop can remain relevant.

According to Forbes, Microsoft has dismissed rumors of a diskless $399 Xbox One. "No, you cannot believe everything you read on the Internet," tweeted Microsoft's chief of staff for the devices and studios group. Wedbush's Michael Pachter also commented that such a device would be "dumb, dumb, dumb."

Sony, however, has been more vocal about the future potential of cloud-based, or diskless, gaming with its PlayStation Now, which was announced during CES in early January. But, PlayStation Now's effects are unlikely to impact GameStop's business model for several reasons.

First, many gamers continue to place an important value on disc-based games, many of which are collectible items such as a GameStop's exclusive $150 Grand Theft Auto collectors edition set. Second, there is a major infrastructure constraint (i.e., bandwidth speeds) for the average gamer, which could limit adoption rates. Third, Sony and GameStop have shared a positive relationship as retail partners, as GameStop provides critical marketing and distribution outlets.

Additionally, the ongoing bandwidth battle between Netflix and Comcast may cause Sony to second guess its strategy of relying on customers to utilize large amounts of Internet data to access games.

Foolish take
Investors may also be under-appreciating GameStop's balance sheet. The company's strong free cash flow can allow buybacks and dividends to play a larger role in shareholder returns. GameStop's $5 per share in cash and zero debt prompted Barron's on Jan. 18 to forecast that shares have an upside potential of 20% or more.

Electronic Arts and Microsoft could grow together over the years as demand for video game consoles and games continues to rise. Granted, Xbox One console sales aren't a primary money-maker for Microsoft, but the Xbox gives Microsoft direct access to the living room and could play a vital role as part of the company's broader mobile/pc/entertainment ecosystem.

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Jayson Derrick has no position in any stocks mentioned. The Motley Fool owns shares of GameStop and Microsoft. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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