News came out on June 23 that video game conglomerate Electronic Arts (EA -0.18%) is planning to buy mobile studio Playdemic from Warner Media. The deal is a part of the Warner Media-Discovery merger that was announced a few weeks ago.
EA is buying the studio for $1.4 billion in cash. Here's what investors need to know about the deal, and what it could mean for the company going forward.
What EA is getting
Playdemic is a small studio based in the United Kingdom. Founded in 2010, it has only 65 employees and is known for one game: Golf Clash, the top-grossing sports game on the Google Play store. The high app store ranking likely means Golf Clash brings in a consistent amount of sales, although it is unknown exactly how much since the studio is not publicly traded.
Outside of the game itself, EA is acquiring dozens of game developers and a decade's worth of experience in mobile gaming, a part of the industry that EA has historically struggled in.
How this plays into its mobile strategy
As I mentioned above, EA has struggled to build out a successful mobile game library. In the company's last fiscal year, which ended this March, mobile games only made up 12.6% of its net bookings (the revenue equivalent for video games). Mobile now accounts for about 50% of gaming industry revenue, and it's projected to hit $100 billion in annual spend by 2023. Electronic Arts has missed out on a huge opportunity struggling to find its footing in this space.
Management is now looking to reverse this trend. Besides the Playdemic acquisition, EA recently acquired Glu Mobile, one of the top mobile studios in the world, for $2.4 billion. The company had $544 million in trailing 12-month bookings at the time of the acquisition, most of which came from popular games like MLB Tap Sports Baseball, Design Home, and Covet Fashion.
EA likely wants to acquire these studios not just for the games they own but for the mobile expertise their developers can bring under its umbrella. EA Sports is the clear leader in sports-based console and PC games with titles like FIFA and Madden NFL. If this success can be replicated within mobile, that would be great news for the division's growth over the next few years.
What it means for the stock
If this acquisition of Playdemic closes, EA will have spent $3.8 billion acquiring mobile studios just this year. For a company with a market capitalization of $39.7 billion and less than $2 billion in operating cash flow a year, these are not small purchases, and investors should expect strong returns from them.
What would that entail? First, investors should expect mobile to climb as a percentage of EA's overall business. This can happen if the teams from Glu and Playdemic help EA improve its mobile strategy among its existing sports titles. This would help EA's consolidated net bookings hit $10 billion over the next few years (it is guiding for $7.3 billion this year), which would likely help the stock push higher.
Overall, Electronic Arts is investing a lot to grow its presence in mobile gaming, and investors should closely follow the results from this division going forward.