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Is Electronic Arts Overtaking Activision Blizzard?

By John Ballard - Dec 22, 2017 at 9:09AM

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Activision still generates more revenue, but EA has overtaken Activision in profitability. Will Activision be dethroned from its top position in the industry?

For several years, Activision Blizzard (ATVI 0.91%) has been viewed as the top dog of the video game industry, not only in terms of the number of best-selling games it produces, but also in financial superiority. Activision has historically led its competitors with the highest revenue, earnings, and operating cash flow.

Recently, however, archrival Electronic Arts (EA 0.89%) has narrowed that gap. While Activision still generates more revenue, EA has generated higher net income than Activision over the last two years.

Graph of two lines with one moving higher than the other.

IMAGE SOURCE: GETTY IMAGES

Is EA about to become the new king of the video game industry? Let's review how EA got to this position and what investors should expect going forward.

EA has completed an impressive turnaround

In 2011, EA was in the middle of a major turnaround after a string of net losses on the bottom line. From fiscal 2008 through fiscal 2011, EA accumulated $2.495 billion in net losses. As its turnaround strategy began to bear fruit, EA finally turned a meager profit of $76 million in fiscal 2012.

Back then, EA management was focused on cutting the number of titles and cutting operating costs to expand margins and improve profitability. Take a look at the table below which shows EA's improvement in net income over the last seven years.

Metric TTM Through Q2 2018 2017 2016 2015 2014 2013 2012 2011
Revenue $5.084 $4.845 $4.396 $4.515 $3.575 $3.797 $4.143 $3.589
Net income $1.187 $0.967 $1.156 $0.875 $0.08 $0.98 $0.76 ($0.276)

AMOUNTS IN BILLIONS. DATES ARE FISCAL YEARS. DATA SOURCE: 10-Q AND 10-K SEC FILINGS. TTM = TRAILING 12 MONTH. 

Activision was also focusing more on fewer, bigger games at the time, just like EA, but it didn't provide the same boost for Activision as it did EA. This is because Activision was already very profitable at the time. Take a look at Activision's financial performance in this table.

Metric TTM Through Q3 2017 2016 2015 2014 2013 2012 2011 2010
Revenue $6.988 $6.608 $4.664 $4.408 $4.583 $4.856 $4.755 $4.447
Net income $1.111 $0.966 $0.892 $0.835 $1.01 $1.149 $1.085 $418

AMOUNTS IN BILLIONS. DATA SOURCE: 10-Q AND 10-K SEC FILINGS. TTM = TRAILING 12 MONTH.

Both Activision and EA saw the video game industry shifting to digital distribution, and have been well prepared. At the time of EA's turnaround, games were starting to turn into a service where players could enjoy the same game for months because of additional content that could be purchased while playing the game.

Mobile gaming was also starting to take off and this was a field where EA was ahead of Activision. EA had assembled a diversified roster of mobile game developers through acquisitions. As both companies correctly assessed where the industry was headed and positioned accordingly, their stocks soared, although EA outperformed Activision because it grew off a lower base of profits.

EA Chart

EA data by YCharts

EA has a lot more financial muscle than it used to, but I think there are good reasons to expect Activision to remain the leader in the industry for the foreseeable future.

Looking ahead

Activision is a company on the move with expanding opportunities across consumer products, esports, and movies. EA is also pursuing esports with its FIFA and Madden sports titles. EA's list of opportunities isn't quite as impressive as Activision's at the moment.

While EA has its own set of blockbuster games, Activision is the only game company that has claimed eight titles with lifetime cumulative revenue of at least $1 billion. This gives Activision more content to work with as it expands into adjacent growth opportunities, such as licensing for merchandise, toys, collectibles, and the broader entertainment world of movies (for example a Call of Duty movie is already planned). Activision has also been finding success in TV with its Skylanders Academy TV show in which Netflix renewed it for a second and third season.

Activision is truly becoming the Walt Disney of interactive entertainment. EA has achieved what is has with a good digital strategy and a focus on the biggest, most profitable games, but its competitors, including Take-Two Interactive, have been doing the same.

What's going to separate Electronic Arts and Activision Blizzard over the long-term is which one is the most successful in growing a profitable business outside of making games. Whichever company is best at this will be the one with the best content that is easily portable to toys, merchandise, and other forms of entertainment. Right now, Activision is way out in front in these pursuits with a huge amount of content across franchises like Overwatch, World of Warcraft, Destiny, and Call of Duty.

EA still has a lot of work to do to outgrow the top dog of the industry. And let's not overlook EA's recent misstep with Star Wars: Battlefront 2. EA faced a backlash from gamers who don't like EA's aggressive use of microtransactions with the game. This mistake puts a speed bump in EA's path.

Go with Activision

Overall, given Activision's hugely popular portfolio of games and its promising pursuit of other growth categories, I expect Activision Blizzard to maintain its lead over the long-term.

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Stocks Mentioned

Electronic Arts Inc. Stock Quote
Electronic Arts Inc.
EA
$122.73 (0.89%) $1.08
Activision Blizzard, Inc. Stock Quote
Activision Blizzard, Inc.
ATVI
$78.57 (0.91%) $0.71

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