Is Electronic Arts Inc. Ready to Be Crowned The King of Games?

If you ask many investors who the top dog is in the gaming business, Activision Blizzard (NASDAQ: ATVI  ) is likely the first name you'll hear. However, there are a few trends that suggest that Electronic Arts (NASDAQ: EA  ) could take the throne over the next few years.

A titan of a hit
While one huge hit doesn't mean a company will move up in the ranks in the gaming industry, EA seems to have created quite a stir with Titanfall, and this hit is one of the first reasons EA may be about to take the crown in the gaming business. A good example of what a huge hit can mean to a company's earnings is best shown by the lift Take-Two Interactive Software (NASDAQ: TTWO  ) got from sales of Grand Theft Auto V in the last quarter.

Due in large part to the strength of Grand Theft Auto V, Take-Two witnessed a jump in overall non-GAAP revenue of nearly 90%. In addition, the strength of Grand Theft Auto Online caused Take-Two's digital sales to increase by 42%.

In the same way, Activision Blizzard gets a boost in sales from its Call of Duty franchise, as well as refreshes to Skylanders and World of Warcraft. EA's Titanfall is off to a strong start and could be another growth engine for the company.

Strong reviews of the game suggests this title will enhance EA's growth profile. One reviewer's take: "The game is easily one of the most amazing multiplayer shooters I have ever played." Another reviewer: "I cannot remember the last time I had this much fun with a first-person shooter... ." Gamers remember when they find a new hit, and it's extremely likely that EA will expand and refresh this franchise.

If this is the future, EA's future is bright
One of the central themes in the gaming landscape is the move to digital sales. While game discs can be shared and traded, the convenience of digital purchases is hard to pass up. In addition, over time, gaming is likely to follow music and video into the digital realm.

If the future of gaming is digital distribution, EA investors should be very pleased. In fact, EA's strength in digital is the second reason the company could take gaming's top spot. In the current quarter, EA generated 34% of its revenue from digital sales. This performance matched Activision Blizzard's digital receipts at 34%.

Of course, the big difference is that EA doesn't have the benefit of huge online franchises like World of Warcraft or Diablo III like Activision Blizzard does. Instead, EA benefits from multiple console titles that transition well to mobile platforms. With Take-Two getting about 17% of sales from digital, EA leads this company and is matching the performance of the current king of the gaming hill.

Maybe the most important trend of all
One certainty in any technology field is that the company with a higher proportion of research and development will many times outperform its peers. Of these three big players in the field, EA spends relatively more on R&D than its competition.

In the current quarter, EA spent 34% on R&D, compared to 13% at Activision Blizzard, and roughly 4% at Take-Two. While a higher percentage of R&D spending isn't always sustainable, EA also has the cash flow to make this level possible in the future.

In just the last three months, EA generated more than $400 million in core free cash flow. By comparison, on average, Activision Blizzard generated about $260 million, and Take-Two produced about $200 million.

With significant core free cash flow and a high level of R&D, EA is set up continue to produce hits in the future. The company's recent Titanfall success is a good example of productive research spending. EA is tied for digital sales as a percentage of revenue with Activision Blizzard today. However, if Electronic Arts' current trends continue, the company won't be tied with anyone in the future.

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  • Report this Comment On April 19, 2014, at 4:18 PM, jeste wrote:

    I find it interesting that this article pays complements to EA to the extent of calling it 'the King of Games', yet has nothing to say about the corporation as an employer. Is the author aware of EA's hiring/payment practices or is this just old news?

    Building an empire on the backs of miserably paid part-timers who are fired every six months, or consistently keeping present long-time permanent employees off balance by 'reorganizing' their departments--with no input from them, of course--and subsequently doing wholesale layoffs which destroy any progress employees may have made internally...

    Yay! Sounds like a *great* company*.

  • Report this Comment On April 19, 2014, at 7:10 PM, speculawyer wrote:

    EA is just crying because Titanfall is a Microsoft Exclusive.

  • Report this Comment On April 22, 2014, at 5:10 AM, wazaus wrote:

    Your article is embarrassing for many reasons. You haven't researched Titanfall sales, or you would know the game has underperformed a lot.

    Microsoft had to BUNDLE the game with the Xbox One, in order to appease the exclusivity deal. Not only that, there was a console discount because of the bundling IN ADDITION to UK Retailers dropping the price of the bundle even lower than RRP.

    In addition, EA delayed the release of the Xbox 360 version for almost month, in order to encourage further sales on the Xbox One console.

    And just today there is news that the game has already been discounted on Amazon (trial sale, but it is an indicator of excess supply) -

    Comparing it to GTA Sales is also a massive overstatement considering the history that series has (4 previous titles, a truly unprecedented sales juggernaut on the Playstation 2, etc).

  • Report this Comment On May 01, 2014, at 3:24 PM, WritinReg wrote:

    Jeste - you are apparently wrong about that seeing EA's own employees have voted EA the best place to work the last two years in a row. Check it for yourself. Whatever we do or don't like about EA - EA employees speak loudly with their votes and praise of EA as an employer. It was not always this way - as it WAS once the worse place to be employed - but that changed some years ago. Also in the EA division I mainly deal with many of the employees has been with the company since this particular franchise started back in 1999/2000. So that tends to throw your argument out the door. EA has no tolerance for unproductivity and slacking on the job - so if you fail at doing your job - yes you will be quickly out the door. Do your job well and it is a different story. In fact pretty much any company that is still having a brisk business today is pretty much like that as well.

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Chad Henage

Chad is a self professed tech nerd and has been investing for over 20 years. He follows nearly everything in the technology and consumer goods sectors, and is a huge fan of the Peter Lynch investing style. He has over 1,000 published articles about stocks and investing. You can follow Chad on Twitter at @chadscards1274.

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