Electronic Arts Is Not A Company For Long-Term Investors To Ignore

The gaming industry is booming, and EA is behind a huge portion of that growth. Here’s what investors need to know about the company.

Motley Fool Staff
Motley Fool Staff
Jun 1, 2017 at 4:09PM
Technology and Telecom

In both 2017 and the last 12 months, the gaming industry has seen massive growth, and its investors have been well rewarded.

In this clip from Industry Focus: Tech, Motley Fool analysts Dylan Lewis and David Kretzmann dive into one of the biggest companies in the space with huge growth in the last few years, Electronic Arts (NASDAQ:EA). Listen in to find out how EA makes the majority of its revenue and why it's so promising for the company's future, what strategies EA is taking to diversify its offerings, how it is tapping into consumer appetite for franchise material, and more.

A full transcript follows the video.

This video was recorded on May 26, 2017.

Dylan Lewis: Looking over at one of the other big players in the gaming market, Electronic Arts is something that sports fans probably know very well, are very familiar with. They make some of the most popular sports games out there, including FIFA and Madden. They have tons of other franchises. Like Activision, EA is really enjoying the fruits of that transition to digital. You see it in their margins.

David Kretzmann: Oh, yeah, absolutely. Their total sales in this most recent quarter was up 17%. Their digital sales up over 30%. And now their digital sales are over 60% of revenue. You're seeing their margins over the past few years, it's so clear, and it's a nice trend to see those margins on the top and bottom line, trending up. And the biggest contributor to the digital sales is what they call "Ultimate Team." This is within their sports franchises, whether it's Madden, NFLFIFANHLNBA Live. And Ultimate Team is kind of the combination of fantasy sports games like fantasy football or fantasy basketball and collecting trading cards. So, you're essentially building a team, and you get these different packs with players and other things. Over time, you're building a team, you're able to trade players, and it takes into account all sorts of things. If you're building a team, a FIFA Ultimate Team, it takes into account the demographic of the player. So, will a Brazilian soccer player get along with an Italian player? It takes into account all these different chemistry items. Last year, management said there were 2 million trades happening in FIFA Ultimate Team every second. So, the level of engagement of people who step into Ultimate Team is staggering.

Lewis: And the idea there, to clarify for listeners, is, I have an Ultimate Team, you have an Ultimate Team, and we have players who are looking to optimize the rosters, or maybe you have a player that I'm a particularly huge fan of and want.

Kretzmann: Right, exactly. You can trade and try to upgrade your team over time, and then you can buy the virtual currency, and maybe acquire certain players or certain packs or something. And you're competing against other players. In the sense of fantasy football where you draft your team and you're following those players, you're trying to fine-tune your team and you're competing against other people, this takes fantasy to a live-action level, where you're actually able to physically play the game, you're able to manage your team over time, and that's something that's really resonated with the players of these games. So that now makes up about 30% of their total digital revenue, that Ultimate Team segment. So, I really like how they're focused on that competitive gaming aspect, e-sports, is actually something that comes up a lot. Activision wants to become the ESPN of e-sports, and really focus on that elite level of players who are literally getting paid to play video games, and people will watch people play video games. Electronic Arts is more focused on individual players competing with one another, and I think they've done a really nice job of creating a really compelling, live, constantly updating experience where you're competing with tens of millions of people around the world, whether it's in FIFA or Madden. And so far, that's been a huge driver of their digital success.

Lewis: And you look at that, and you're like, well, this is something that they just could not have done before the internet enabled gaming to really take off. Back in the model of 15 years ago, where people were buying discs and they weren't on consoles that were connected, you were playing with your friends in your house. And it was nice because people had to buy the discs, but they didn't have all of these additional purchases that people could be making. The microtransactions, it seems, are becoming a growing and growing segment for a lot of these video game producers.

Kretzmann: Yeah. In the case of Ultimate Team, I think it launched in 2009, and initially it was an add-on feature that you needed to pay more for. So, you would buy the disc, and then you could buy access to this feature. But now with something that comes free initially, so anyone can join. But once you're in, you tend to be locked in, and you stick with it. And then I think a good amount of people end up spending money there. So, obviously, with Electronic Arts, that sports area is where they dominate. I also really like what they're doing to expand into the action and shooter genre, which are the biggest genres within the video game space. They have Battlefield 1, which was a huge hit last year, and that's performing better than the sequel to Battlefield 1, which is called Battlefield 4, which is a little confusing, I'm not sure how they came up with the names there. But, essentially, they're seeing higher engagement with Battlefield 1 than they were seeing with its predecessor over a comparable period. So, that's always nice to see.

They also have, essentially, a decade licensing agreement with Disney to pump out Star Wars games. Coming up this year you have Battlefront 2, which looks like a very compelling game. The first Battlefront reboot that Electronic Arts did a couple years ago, it got kind of timid reception from fans, but it looks like they've incorporated a lot of the feedback, and people are really excited about that game, so I think that will be a big hit for them. And, obviously, as you have more Star Wars movies coming out over the next few years, I think that puts them in a golden position. That also goes to mobile. There's the Star Wars: Galaxy of Heroes mobile game, which is sort of a similar concept to Ultimate Team, where you're able to trade the different characters and collect the characters, kind of a collecting fantasy game. The average user spends 162 minutes a day playing that game, and that number has steadily ticked up over the last year. I mean, that's about two and a half hours a day for the average user on that game. I don't know what that means for productivity in the world. 

Lewis: I would love to see that metric for Fools. [laughs] 

Kretzmann: I know. We could count it as research, though, so we have that perk. But, just, the level of engagement that they've been able to create just shows that they're producing some incredibly compelling content. By comparison, I think the average power user of Candy Crush is spending more like 35 minutes a day. In the case of this Star Wars mobile game, be careful when you download that, because you might lose a lot of time out of your day.