Why Electronic Arts Shares Popped 10% to a New High

Ignore the quarterly loss -- it's just about taxes.

Motley Fool Staff
Motley Fool Staff
Feb 12, 2018 at 5:36PM
Technology and Telecom

In this segment of the Motley Fool Money podcast, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Hidden Gems Canada's David Kretzmann discuss the interesting quarter that video game leader Electronic Arts (NASDAQ:EA) just finished.

If you're not a gamer, you might have missed the brouhaha the company faced over its "pay-to-win" loot boxes in Star Wars Battlefront 2. Suffice it to say that fans were upset, which did cut into projected profits. But Electronic Arts has other ways to make money, and it did.

A full transcript follows the video.

This video was recorded on Feb. 2 2018.

Chris Hill: Shares of Electronic Arts up 10% this week and hitting a new high after third quarter results. David, their third quarter, they posted a loss of nearly $200 million. That's tax stuff, right?

David Kretzmann: Yeah, mainly tax stuff. The results for this quarter were actually a little below what management had guided for, mainly because of the backlash they had with Star Wars Battlefront II. There was a lot of backlash when that game was launched in November about the high cost of credits that players needed to unlock key characters like Luke Skywalker, Darth Vader. You'd essentially have to play the game for, some estimated 40 hours, or pay up and buy those credits, to play those hallmark characters of the franchise. So, they faced some backlash for that, they sold about a million less units as a result. But at the end of the day, that didn't really matter, primarily because of the Live Services business, which grew nearly 40% to about $800 million in net bookings for the quarter. That's the stuff like the in-game microtransactions, live competitions with other players online. They ended up raising their guidance going forward because of the strength of that Live Services business. So, you're seeing that digital component, that microtransactions and live competitions component, become a huge driver of the business.

Matt Argersinger: Yeah. I just wonder, though, if we're getting closer to a tipping point. If you go back, micro-transactions was kind of a nascent thing that all these video game companies did. You pay a reasonable cost to play the game, and then you'd buy a map or a character for some nominal fee. Now, I think it's actually become the business model for Electronic Arts, Activision Blizzard. And I worry that the backlash of Battlefront II could be that point where, OK, there are too many microtransactions, we're asking too much for our players to pay additional money, and maybe that changes a little bit.

Kretzmann: Yeah, it's definitely a thing to watch. There was a legislator in Hawaii who basically had a press conference after this backlash with Battlefront II saying, "Maybe we should look at regulating this similar to online gambling. Are we giving these addictive games to our children?" Hopefully it doesn't come to that, but certainly a risk to watch.