The video game industry is booming. What's not to like about Electronic Arts (NASDAQ:ERTS)? It's the leader in the video game space, with impressive franchises and undeniable growth potential. Its Madden football games alone have generated an astonishing $2 billion in revenues over 17 years.
Sure, the video game industry tends to be cyclical, and investors sometimes get really down on publishers like Electronic Arts and its rivals Activision (NASDAQ:ATVI), THQ (NASDAQ:THQI), and Take-Two Interactive (NASDAQ:TTWO). That's especially true when there are no clear catalysts to drive game sales, like the latest iterations of next-generation consoles from Microsoft (NASDAQ:MSFT), Sony (NYSE:SNE), or Nintendo.
However, we're now in the upswing of the console cycle, with the long-awaited PlayStation 3 gradually hitting the shelves over the next couple of months and Nintendo's new Wii console launching in November, just in time for the holiday season. This bodes well for Electronic Arts.
Better yet, video game sales surged in September according to NPD. Revenues grew 29% to $446 million, and Electronic Arts' Madden NFL 07 is credited with helping push that number higher.
Game on
The growth trajectory for Electronic Arts certainly doesn't begin and end with the gaming console cycle. I recently noted some comScore data on the continuing growth of the video game market, and another comScore survey revealed surprising demographic information about today's average gamer, long stereotyped as a teenage boy. In truth, women now represent 52% of gamers. The average gamer is 41 years old, with an average annual income of $55,000. He or she has been online for nine years, and a whopping 84% of gamers have high-speed Internet access at home, further enabling their online video game habits (or addictions). Have you ever played solitaire or Bejeweled? You're a gamer, too -- gaming isn't just about hardcore fans of online role-playing games like World of Warcraft. Electronic games can be a great way to relax or kill time.
Furthermore, comScore pointed out that the industry is ripe for advertising within its virtual game worlds. It seems gamers aren't even that averse to the idea -- apparently, a lot of the hardcore gamers believe that in-game advertising will actually make virtual worlds more realistic, not less. Fellow Fool Steven Mallas recently reviewed the latest developments in in-game advertising, a trend on which companies like Electronic Arts are surely set to capitalize.
Don't forget that gaming's about more than consoles or computers, although Electronic Arts participates in both those areas. Mobile gaming thrives on platforms such as Nintendo's GameBoy, Sony's PlayStation Portable, and cell phones. Electronic Arts bought JAMDAT to strengthen its position in mobile games; the company also provides games through both its Pogo Web site and Time Warner's AOL.
The leader of the pack
I'm not the first to call Electronic Arts the leader in its field, despite its many competitors. Although the monster hit Madden series may be EA's most prominent title, it has plenty of other great franchises, from The Sims to Harry Potter and Lord of the Rings. But while most of its rivals depend largely on such licensed properties to create hit games, EA owns 40% of its content.
Longtime Fool Rick Munarriz recently listened in on a Wall Street presentation by Electronic Arts, reporting that despite its strong positioning, EA has only 22% of the U.S. market (and 23% in Europe). That gives it plenty more room to steal share from rivals in a market that should keep growing by leaps and bounds. As video games expand from a niche pastime to mainstream entertainment, Electronic Arts should be there to reap the rewards.
Electronic Arts stock has been on a run lately, appreciating nearly 30% in the last three months. Nonetheless, investors have good reasons for optimism about EA's tremendous growth potential.
Electronic Arts, Activision, and Time Warner are Motley Fool Stock Advisor recommendations. Microsoft is a Motley Fool Inside Value pick.
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Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.
