2020 has been an ideal year for video game stocks. Millions of people are at home more than normal looking for entertainment, and video games can fill that gap.
As one of the biggest video game companies in the world, Electronic Arts (EA -0.44%) is certainly one of the biggest beneficiaries of the growth in gaming. But is that reason enough to buy this video game stock?
A growth stock?
The narrative in 2020 is that gaming stocks must be experiencing growth due to the pandemic, but that's not what the evidence shows. You can see below that there may be a small increase in Electronic Arts' revenue, but there's hardly been a noticeable impact on operations.
Meanwhile, revenue and net income were down in the third quarter of 2020, which undermines the growth narrative. What's going on with Electronic Arts, and why isn't it doing better during the pandemic?
Games are more diverse than ever
A decade ago, being a gamer meant having the latest and greatest console, which drove game sales of titles like Madden, FIFA, and Medal of Honor for Electronic Arts. Today, the market is fragmented between consoles, PCs, and mobile devices. There are hit games each year, but EA's titles are being replaced in the gaming world by popular games like Fortnite and Roblox. That's where we're seeing growth -- not in EA's titles.
It's also easier than ever for a small studio to create a game that can quickly reach the masses. When disks and cartridges were the main forms of distribution, scale mattered for developers, and Electronic Arts took advantage of its big franchises. Today, any app on the app store can reach millions of users in a short amount of time. There's simply a lot less friction in the distribution channel than there's ever been. And that's tough for EA to adjust to.
Where's the value?
There's a certain level of consistency that Electronic Arts brings to the video game industry, and that can be a draw for investors. But the company is more stagnant than you might think given how much attention video games have gotten during the pandemic. And when you look at operations, EA still relies on legacy titles like Madden and FIFA to drive revenue and earnings each year. Those legacy titles aren't driving growth, and it doesn't appear there's a hit video game title waiting in the wings.
Even given the struggles EA has had growing, investors are pricing the stock very richly. Shares trade for over 30 times earnings, and price to sales is over seven. That's a rich price for a company that's not growing -- and even arguably being disrupted by more innovative video game studios. This is not a stock I would buy, despite a good year for the video game industry.