3 Reason's Electronic Arts, Inc.'s Stock Could Rise

Electronic Arts has been a great stock to own in 2014, but if these three things happen, shares could have even further upside.

Aug 26, 2014 at 12:00PM

Video game publisher Electronic Arts (NASDAQ:EA) has had a phenomenal year -- shares are up more than 60% in 2014 alone. A string of solid earnings reports and a pickup in console hardware sales seems to have propelled shares to the upside.

Although Electronic Arts is currently trading near its 52-week high, shares could continue to rally in the coming quarters. Below are three reasons as to why Electronic Arts' shares could continue to rise.

Next-generation consoles continue to move millions
Electronic Arts releases video games for a wide variety of platforms, including PC and mobile devices. But its most popular game franchises -- Madden, Fifa, Battlefield, Dragon Age, among others -- are primarily targeted at gamers who own PlayStation or Xbox video game consoles.

Sales of the latest consoles, the PlayStation 4 and Xbox One, have shattered records. The PlayStation 4, in particular, has sold so well that it caught Sony off guard. The Xbox One has been a bit more sluggish, but has still sold at least 5 million units into the retail channel.

The more these consoles sell, the more likely it is that Electronic Arts will do well. Although Electronic Arts' games face extensive and brutal competition, the larger the platforms, the more potential customers Electronic Arts can target. Continued strength in new console hardware should be seen as a positive for Electronic Arts.

EA Access attracts millions of subscribers
In the past, Electronic Arts has been forthright in its desire to transition its business model away from physical game discs. This makes sense, as digital sales of Electronic Arts' video games have a higher margin (no retailer cut) and cannot be resold.

Late last month, Electronic Arts announced EA Access -- a subscription-based program that gives gamers digital copies of Electronic Arts' older games for a flat monthly (or annual) subscription fee. EA Access benefits Electronic Arts in two ways -- first by allowing it to monetize older games, and secondly, by making it more likely that its subscribers will purchase digital games going forward. In addition to the games, subscribers also get a flat 10% discount on Electronic Arts-related digital content, making it more likely that they'll go digital.

To be clear, EA Access is currently limited to the Xbox One -- Sony has explicitly banned the service from the PlayStation platform. With the program less than a month old, subscriber numbers are nowhere to be found, but in time, Electronic Arts may offer investors a closer look at the success of its new program. The more popular EA Access becomes, the better for Electronic Arts.

New games exceed expectations
Lastly, and most importantly, is the relative success of Electronic Arts' games. As a video game publisher, Electronic Arts is ultimately beholden to the gamers -- if its games exceed expectations, Electronic Arts could see unexpected sales growth.

This fall, investors should look to upcoming titles like Madden 15, NHL 15, Fifa 15, and Dragon Age: Inquisition. Strong reviews, and better than expected adoption, would give Electronic Arts a boost.

Next year, Electronic Arts' upcoming slate of games should include Battlefield: Hardline and Star Wars: Battlefront. A sequel to Mass Effect 3 and another Titanfall are also possibilities. If these games sell, and sell well, Electronic Arts should outperform.

Can Electronic Arts live up to expectations?
Trading with a price-to-earnings ratio in excess of 100, investors certainly have high expectations for Electronic Arts.

But going into what appears to be the peak of a new console cycle, Electronic Arts may be undervalued. If next-generation consoles continue to sell well, its games are well-received, and its new digital initiatives result in better margins, Electronic Arts' shares could see further upside.

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Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.

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