If you bought Electronic Arts (NASDAQ:EA) anytime in the last year, there is a very good chance you've made money. With the stock up more than 60% in the last twelve months, it might be time for investors to take some off the table. In fact, there are three reasons to believe EA's future may not be as bright as its past.
One of the main things that many EA investors look at as a strength is actually the first reason investors may want to take profits. EA gets about 13% of its revenue from mobile gaming. By comparison, Activision-Blizzard (NASDAQ:ATVI) gets about 11% from mobile, and Take-Two Interactive Software (NASDAQ:TTWO) reports that most of its revenue comes from Console and PC sales.
Since millions of customers are buying and using smartphones and tablets, this provides a huge opportunity to game publishers. Since EA is heavy into mobile gaming, this should be a big win for the company. The problem is, mobile gamers are a very fickle bunch.
In particular, a study from last year showed that the highly desirable demographic of the 25-34 year old age group actually uses games less than other demographics. It's possible that this age group that grew up with a plethora of console video games and handheld games is somewhat tired of gaming.
These same groups tend to use sports and fitness apps and media apps more than games. Given that this group will influence the next generation of potential mobile gamers (their children), it's possible mobile gaming may not be the huge growth opportunity that EA investors might expect.
EA has a strong lineup of games that it regularly releases updates for. Between games like Madden, FIFA, and now UFC, EA still relies heavily on sports for its sales. The company's Battlefield game has done well, but still doesn't garner the attention of Activision-Blizzard's Call of Duty franchise.
When it comes to throw back games, EA is planning an updated Star Wars: Battlefront game, which puts the company in competition with other throwbacks like Take-Two's Borderlands: The Pre-Sequel, and Side Meier's Civilization: Beyond Earth. In each case, the companies are relying on the popularity of games that are in some cases multiple years old.
This leads us to the second reason it might be time to take profits in EA. One of the company's biggest game announcements is UFC with Bruce Lee, which is out right now. While this is good news for EA investors in the short-term, this potential hit also pulls these sales out of the fall and winter sales cycle.
Given that Activision-Blizzard has new games or expansions from Call of Duty, Skylanders, Diablo III, and World of Warcraft, it may be difficult for any publisher to match this release schedule. Take-Two needs to have a big follow-up to its Grand Theft Auto V hit from last year, but neither EA nor Take-Two seems capable of generating the kind of excitement as Activison-Blizzard will this fall.
A big part of the problem
The third reason investors may want to take profits in EA is the company's research and development seems to need some...development. As a percentage of revenue, EA spent almost 26% of its revenue in the current quarter on research and development. Compared to Activision-Blizzard at 13%, or Take-Two at 15%, this high level of spending should reassure investors.
However, if we look at what EA has planned there is little evidence that all of this R&D spending is paying off. The company's upcoming releases like Mirrors Edge is a reprisal of a game introduced seven years ago. While a new Star Wars Battlefront game has been requested for years, this original title was released 10 years ago.
Other titles like Need for Speed are 20 years old, and the only game that feels completely new from the publisher is Titanfall.
Time to save the game
With most investors showing a profit and tough comparisons for 2014, now might be the time to take profits in EA. The company needs more hits like Titanfall and must come up with more original concepts instead of just updating rosters in sports games.
EA has been playing catch up to Activision-Blizzard for the last few years, and unless the company makes some changes, EA will be stuck in second place. For many investors it's probably time to save their game and take profits in the stock.
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Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Take-Two Interactive. The Motley Fool owns shares of Activision Blizzard. 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.