Is It Time to Buy Electronic Arts Stock?

It has been a great year for investors in Electronic Arts (NASDAQ: EA  ) , as shares of the video game publisher have risen more than 65% in 2014. A new generation of consoles and a string of hit games have propelled the stock to levels not seen since before the financial crisis.

Can Electronic Arts continue to deliver? At current levels, the stock appears relatively expensive, yet there are many reasons to believe Electronic Arts shares could head higher.

Aggressively valued
Electronic Arts stock looks pricey on a pure valuation basis. It is trading with a price-to-earnings ratio in excess of 100, as it hasn't been consistently profitable over the last year. Rival Activision Blizzard, in comparison, is more favorably valued (with a trailing P/E of roughly 50), but far more leveraged.

Yet it may be unfair to judge Electronic Arts solely on its trailing 12-month performance. Going into the peak of the new console cycle (the PlayStation 4 and Xbox One are less than a year old), the company is likely to perform far better in the coming quarters than it has in the recent past. Indeed, there is growing evidence that the console cycle is already benefiting Electronic Arts' business: Last quarter, for example, the company notched a 51% jump in net profit and a 57% increase in adjusted net revenue. A better measure of valuation may be future estimates, where things look far more positive. On a forward basis, Electronic Arts trades with a price-to-earnings ratio of just 16 -- a far more palatable figure.

The next generation is here
Investors have lofty expectations for Electronic Arts, but the company could meet or even exceed them if the current console cycle continues to outperform. Although the Wii U, released in 2012, has largely been a failure, the Xbox One and PlayStation 4 video game consoles have seen far more success, with roughly 15 million devices (combined) sold. The PlayStation 4, in particular, has smashed sales records in becoming one of the fastest-selling video game consoles of all time.

As one of the largest publishers, those consoles represent an opportunity for Electronic Arts. Upcoming titles including Dragon Age: Inquisition, Star Wars: Battlefront, Madden 15, and Battlefield Hardline could be eagerly purchased by gamers looking to put their new hardware to use.

Electronic Arts' best asset
Ultimately, Electronic Arts' best asset may be its forward-thinking management team. 

Although primarily positioned in the traditional console space, the company plays in virtually every market, including mobile and PC gaming. While Activison Blizzard and other rivals have been somewhat cautious in their approach to mobile, Electronic Arts has entered the space aggressively: Last quarter, Electronic Arts' mobile games generated over $120 million in revenue, up 11% from the prior year and nearly 7% on a sequential basis. The mobile business generated about 10% of the company's total net revenue. (For comparison, Candy Crush-maker King Digital regularly generates almost six times as much mobile revenue, but lacks Electronic Arts' more established console business and is still valued at about 40% of EA's market cap.)

Recently, Electronic Arts announced EA Access, a first-of-its-kind subscription program that allows the company to monetize its older titles. Owners of the Xbox One can subscribe to EA Access for $5 a month, or $30 per year. In exchange, they can download and play a select group of Electronic Arts' older games. Rival publishers, including Ubisoft, have said they are interested in borrowing the concept, and if it takes off, Electronic Arts could be seen as something of a trendsetter. As a new program, the success of EA Access remains unknown, but if it draws significant interest from the Xbox One community, it could be a nice boost to Electronic Arts' digital revenue. 

At the same time, Electronic Arts is rumored to be interested in cloud-based gaming. In May, Reuters reported that the company had nearly reached a deal to stream its games to the cable boxes of Comcast cable subscribers. Though it remains unconfirmed, such a deal makes sense, as it would allow Electronic Arts to sell its games to those who cannot afford an expensive console. Comcast has about 20 million cable subscribers, and could have 30 million if its planned acquisition of Time Warner Cable goes through. Many of those subscribers already own a game console, but plenty don't. A deal with Comcast would dramatically expand Electronic Arts' access to an untapped market.

In the PC gaming space, Electronic Arts owns Origin, a digital platform and distribution system for its popular PC gaming titles, including The Sims and SimCity. In size and scope, it lags behind market leader Steam, but with PC gaming overtaking console gaming in terms of revenue, Origin may be an underappreciated asset. Last quarter, PC games generated about one-fifth of Electronic Arts' total net revenue.

A bet on electronic gaming
In a recent letter to employees, Microsoft CEO Satya Nadella noted that gaming was the "single biggest digital life category ... in both time and money spent."

If investors are willing to look past its aggressive valuation, and look forward to future growth, Electronic Arts could be an attractive stock. As a bet on electronic gaming, it appears well-positioned. Its established franchises and forward-thinking management should benefit the company heading into the peak of a new console cycle, while its investments in mobile and PC gaming ensure its business is unlikely to be disrupted anytime soon.

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