Electronic Arts' (NASDAQ:EA) stock has surged this year, but you wouldn't know it by watching the video-game industry alone. Game sales have fallen as the current generation of gaming consoles has grown long in the tooth, a trend that drove down revenue and earnings in EA's most recent quarter. With two new consoles from Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) on the way this year, however, could the long-awaited next generation of gaming propel EA's stock to even higher heights?
Riding Microsoft and Sony's buzz
Sony's next-gen PlayStation 4 and Microsoft's recently announced Xbox One are making the game industry buzz with excitement.
The former's PlayStation 3 of the current generation was released all the way back in 2006; Microsoft's competing Xbox 360 came a year earlier, making it quite a long time since new gaming power arrived for the console industry. As technology in both consoles has been pushed to the limit, game developers such as EA are clamoring to climb on board with both companies' new devices when they release later in 2013.
The current generation of consoles has brought hundreds of millions of consumers into the game industry, and more buyers are good news for EA. Research manager Lewis Ward at International Data Corporation estimates around 250 million PlayStation 3s, Xbox 360s, and Nintendo (OTC:NTDOY) Wii units sold between 2005 and 2012, generating a massive base for EA to tap into -- and capitalize it has.
Yet Ward is less optimistic about the next generation of consoles. He believes that consoles have peaked as mobile and other gaming trends grow and expects the Xbox One and PlayStation 4 sell less than their predecessors. Nintendo has already followed that trend, with its new Wii U console selling more than 2 billion units less than the company expected after its launch late last year. Still, with console gaming commanding more than 40% of the video game industry's worldwide market share despite mobile and online gaming's rise, and EA can't afford to miss on its best games heading into the next generation.
What will drive EA's next-gen console revenue?
Even if the Xbox One and PlayStation 4 can't match their predecessors' success, don't think EA's out of the game. As the current console generation has aged, the company has continued delivering huge hits in its sports games, such as the Madden NFL and FIFA series that release new titles yearly to millions of sales. EA announced those series to continue on Sony and Microsoft's new offerings, as well as bringing back basketball simulation NBA Live for the next generation.
FIFA 13 alone sold almost $350 million in digital revenue alone in the 2013 fiscal year and sold 30% more units than FIFA 12. Expect that game and EA's fellow sports simulations to remain solid cash cows for this company, particularly with EA developing its new Ignite gaming engine to upgrade the play and look of its sports titles for the next generation of games.
If EA wants to thrive in the next generation of consoles, however, it has to hit a home run with its next title in the massively popular Battlefield series of first-person military shooters. The company announced Battlefield 4 for both Sony and Microsoft's new consoles, hoping to double down on the success of Battlefield 3, which sold more than 8 million copies in just over a month when it launched in 2011. Battlefield 3's continued to drive EA's revenue higher, with its Premium service alone raking in $120 million in revenue last quarter.
Still, EA will have to compete better with rival Activision Blizzard (NASDAQ: ATVI) and its video-game goliath Call of Duty in the next generation. Activision's Call of Duty: Modern Warfare 3, which launched head-to-head against Battlefield 3 in 2011, sold 6.5 million units in its first 24 hours, and the company has another title ready to go for the new generation with Call of Duty: Ghosts recently unveiled. It's doubtful EA will be able to beat Activision's dominance in the military shooter genre any time soon, but the company needs to push Battlefield's success even harder with the PlayStation 4 and Xbox One.
Will Disney's gift deliver?
EA plans to unveil a number of other new next-generation games at the 2013 Electronic Entertainment Expo this June, but if there's one license that can seal a win for this company's next-generation future, it's Star Wars.
What does George Lucas' -- and now Disney's -- sci-fi saga have to do with EA? After Disney earlier this year shuttered game developer LucasArts -- part of its $4 billion purchase of the Star Wars property from Lucas -- the entertainment giant inked a deal with EA to develop and publish Star Wars games for the next few years. While no official titles have been released, a brand with a fan base as strong as this one is a sales bonanza in the making for EA.
This is an opportunity it can't afford to let go. EA's last Star Wars game, massively multiplayer online offering The Old Republic, arrived last year with a lot of hype and failed to deliver on its promise, going free-to-play earlier this year. The company reportedly has three top developer studios already at work on future Star Wars games. While investors shouldn't expect to see these games arrive before next year, a major Star Wars game hit could generate massive sales and cement EA as the top game publisher of the new console generation.
EA's push into mobile gaming, as well as its microtransactions digital download strategy, should help firm up the company's financials in the future, but console gaming still dominates this industry. The new generation of consoles from Microsoft and Sony will make or break this stock in the next few years. If EA can take its established franchises and potential winners of tomorrow to new heights, this stock's recent rise may be just the beginning of something big.