Investors are avoiding the video game industry right now on fears of an impending growth slowdown. That temporary slump could be creating an unusually attractive buying opportunity for one of the biggest developers, Electronic Arts (EA -0.40%).
EA has a packed content pipeline, which should help it maintain sales growth even as interest wanes in the category following several years of soaring demand. But there are other reasons to like the stock today, too.
Let's look at the biggest ones.
1. The portfolio of dreams
Rival Take-Two Interactive (TTWO 0.26%) made a splash in the industry with its recent purchase of Zynga, which is giving it a more complete footprint across the main gaming platforms of PCs, consoles, and mobile devices. But EA has been at this game much longer and already boasts the type of platform diversity that peers are working toward.
EA's mobile bookings were $1.2 billion over the 12 months ended in late June, up 49% year over year, thanks to cross-platform franchise hits like FIFA and Sim City. The catalog is stacked with popular titles across pillar niches including sports and battle royale. EA's nearly $8 billion in annual sales give it leverage and flexibility . For context, Take-Two is aiming for $5.8 billion in revenue this year following its Zynga acquisition.
2. Follow the cash
Video games are becoming more subscription based, which gives developers the type of cash flow characteristics that make software-as-a-service companies so attractive. EA is an industry leader in this financial arena.
Free cash flow is on pace to reach $1.5 billion this year, giving management plenty of resources it can direct toward game development, marketing, and improvements to its platform. This cash is increasing coming directly back to shareholders, too, in the form of dividends and stock buyback spending.
3. Stability through content
One big risk for video game developers has been that a major flop would sink its growth prospects for several quarters. Activision Blizzard (ATVI) had to lower its sales expectations, for example, after delaying two major titles out of the current fiscal year.
But EA's size, and its stellar portfolio, are reducing that risk to a more manageable level. Just look at the current fiscal quarter, which will see the launches of major titles in the FIFA and Madden franchises. EA has been building relationships with gamers through these brands for decades, and that helps explain why they can be counted on to deliver good engagement every year.
Sure, EA's business is exposed to risks including a consumer spending pullback or further disruptions in the digital advertising market. But it has a leadership position in many attractive entertainment niches, including the mobile segment that caters to over 3 billion people around the world.
Five years from now, few video game investors will remember a modest pullback following demand surges in earlier phases of the pandemic. But they'll likely be happy that they held on to EA stock over the next few years as the company deepened its relationship with gamers and widened its portfolio reach.
Despite the bumps that are sure to come along the way, EA should deliver solid returns to shareholders who simply stick around.