This holiday season will see new gaming consoles launch from Sony and Microsoft. The last console launch from these companies in 2013 was good for video game stocks. Activision Blizzard, Take-Two Interactive, and Electronic Arts (NASDAQ:EA) saw their share prices soar. The worst performer was Activision Blizzard, which still saw its share price nearly double between the end of 2012 and 2014.
An analyst with KeyBanc recently issued a positive note on the near-term prospects for Activision and Take-Two based on their announced game slates. At BlizzCon in 2019, Activision announced Overwatch 2 and Diablo 4, but specific release dates were not given. Take-Two recently disclosed an impressive pipeline of 93 titles planned for release over the next five years, although the company admitted that some of them won't make it to completion. All said, investors like it when video game executives are transparent about where growth is expected to come from.
That's why some investors might be skeptical about how well Electronic Arts is positioned for the new console cycle. EA doesn't have much announced for its upcoming slate, other than new annual versions of its sports franchises and Star Wars: Squadrons.
However, investors shouldn't make the mistake of assuming that just because EA hasn't made any big announcements that it is not positioned for growth. Here are three reasons the company is well prepared for the next console cycle.
1. A new Battlefield is coming
This year would have been a great time to release a new Battlefield game. The last iteration of the best-selling shooter series, Battlefield V, launched in Nov. 2018. EA typically releases a new Battlefield title every two years, but the company decided to spend more time working on the next installment, which is due out in fiscal 2022 (which ends in March of that calendar year).
The extra year of work should lead to a good experience for players. During the fiscal fourth-quarter earnings call, CEO Andrew Wilson provided investors with an update, stating: "Battlefield is progressing very, very well. We're excited by what the team's doing."
Battlefield is one of the two dominant premium shooters on the market, along with Activision's Call of Duty series, so a new Battlefield is a big deal for EA. In fiscal 2012, Battlefield 3 made up 11% of EA's total revenue. Battlefield 4 also made up 11% of total revenue in fiscal 2015.
Users of NVIDIA's RTX series graphics cards got a first look at what raytracing did for the last Battlefield title. The next installment will give console players the first chance to experience the title using raytracing graphics technology, which is a key feature of the PlayStation 5 and Xbox Series X.
2. EA has a deep pipeline
EA may not have wowed analysts by announcing it had dozens of titles in development like Take-Two did, but it is investing in the future like everyone else.
During the last conference call, an analyst asked management, specifically, about its pipeline. Here is CEO Andrew Wilson's response:
We've talked before about having new IP in development, both for console and PC and for mobile. We're excited about that. And I'd also say we've got a number of new incubation products that are starting to come together that are looking exciting for the future as well. So I don't think we've ever had as robust a pipeline of content ahead of us as we have right now.
Wilson also called out EA's focus on growing its live services revenue, which has been the company's main growth engine in recent years thanks to the popularity of Ultimate Team in its sports titles, as well as in-game spending in Battlefield. Live services grew 15% in fiscal 2020 and made up 53% of net bookings.
3. EA expects to resume revenue growth next year
EA considers live services and annualized releases from sports titles, like Madden and FIFA, to be a recurring stream of revenue. During the last console transition in fiscal 2014, EA generated just 25% of its total revenue from extra content, subscriptions, and advertising, which is now included in live services. With more than half of its business coming from live services heading into the new console cycle, EA doesn't need to release a bunch of new titles to maintain sales.
When the PS4 and Xbox One launched in 2013, it was necessary to release new games, but EA is a much different business now. It has the luxury of spending time working on new games because of the success of its live services business, as well as the success of its esports title Apex Legends, which makes money from add-on content.
While EA expects net bookings in fiscal 2021, which ends in March, to be virtually flat year over year, management expects to resume growth in fiscal 2022 with the release of the next Battlefield.
"While there are always challenges and interesting hurdles that we face delivering great interactive entertainment experiences, I would tell you, I'm very excited by what I see more so than I have been for our pipeline for a long time," Wilson said.