Investors had low expectations for Electronic Arts (EA -0.54%) during the early months of 2022. Its share price declined by as much as 15% this year over fears of a slowdown in consumer spending, poor reports from competitors like Activision Blizzard (ATVI), and worries about how the company's comparative results would look as it lapped periods when the pandemic was boosting the amount of time people spent playing video games.
EA assuaged all of these worries with the strong fiscal Q4 2022 earnings report it released on May 10. That report put the stock on an upward trajectory. It's now up almost 20% this month and over 5% year to date -- well outpacing the broad S&P 500, which is down around 12.5%. But it's not too late for investors to buy shares of EA. Here are three reasons why.
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1. Its sports franchises are gifts that keep on giving
EA has long been known for its sports games, specifically the popular FIFA Soccer and Madden NFL franchises. These games have minimal direct competition and have built up huge player bases over the years. This allows EA to sell fans new copies each year, updated with the latest players and stats along with tons of different add-ons and virtual features. Management does not give out specific financials for its EA Sports division, but said in its latest earnings presentation that FIFA Soccer has more than 150 million active accounts and that FIFA 22 was the most successful game in franchise history.
The deal that EA Sports had with FIFA for naming rights on the soccer video game just lapsed. After this year, releases in the franchise will carry the name EA Sports FC. At first, this might seem concerning to investors, but the deal in question was just for the name of the game and the rights to the official World Cup eSports tournament. EA Sports still has the "name and likeness" rights to all the major soccer leagues and players around the globe, which should keep video game players around. Other companies could produce soccer simulation titles, but if they can't offer gamers the ability to take the virtual pitch with players like Lionel Messi and Christiano Ronaldo, I doubt they'd have much luck competing with an EA Sports FC release.
The Madden NFL franchise has a simpler licensing model, given that there is only one professional American football league. EA has secured the exclusive license for a pro football simulation game through either 2025 or 2026 (depending on whether the NFL wants to extend it for a year). These licensing dynamics make the sales of EA's sports franchises some of the most durable revenue in the video game industry.
2. Apex Legends Mobile is here
The biggest hit within EA's portfolio of games in the last few years has been Apex Legends. The battle royale shooter is currently the fifth-most-popular game on the streaming platform Twitch, and is now doing over $1 billion in annual net bookings (the revenue equivalent for video games). Given that EA's net bookings were $7.5 billion during its fiscal 2022 (which ended March 31), the franchise is providing at least 13% of the company's top line at the moment.
Further, in fiscal 2022, Apex Legends' net bookings grew by 40%. Recently, it launched a mobile title for the franchise called (you guessed it) Apex Legends Mobile. It has only been available for a couple of weeks, but so far, it is getting plenty of traction on the smartphone app stores; it's currently the fourth-most-downloaded free application for iOS in the United States. A popular mobile title can be quite lucrative -- for example, Call of Duty: Mobile did over $1 billion in net bookings last year -- so a successful Apex Legends Mobile could drive top-line growth at EA for years to come.
3. Its college football franchise is coming back
Lastly, EA should benefit from the revival of its NCAA College Football franchise. The company decided to stop publishing new versions of the game in 2014 due to the trickiness around paying amateur athletes. But thanks to the new image and likeness rules that allow college athletes to get paid, EA has decided to relaunch the franchise, with a rumored release coming in the summer of 2023. The public has not been given any details yet about how the franchise will be run. But however the game is monetized, it should be a net positive for EA's financials over the next five years.
Overall, EA has set itself up for durable top-line growth. Given the strong unit economics of video game publishers, that makes the stock a great buy here, even with shares up by around 20% in the last month.
