Electronic Arts (EA 0.83%) got word recently that its newest game, Battlefield 4, would be banned in China. Even references to the game have been blocked on Chinese search engines such as Weibo. The Ministry of Culture has decided that the world war-themed game, set in China and depicting a future in which China, the U.S. and Russia are at war with one another, hits too close to home and is a "threat to national security." This piece of bad news is on the heels of the company's earnings release at the end of October that reported a $273 million loss. Tough break for this game maker to be missing out on the biggest market of online gamers in the world for their most recent hope of revenue generation.
Screenshot from game play-EA.com
China has an enormous, and growing, user base with an estimated 141 million online gamers in the country in 2014, up from 68 million in 2009 according to China Market Watch, a research group. This game being banned in China is bad news for EA games, who has seen great success with their previous edition of the game, Battlefield 3, which sold more than 5 million units in its first week on the market. EA games released Battlefield 4 around the same time as Activision Blizzard (NASDAQ: ATVI) released their most recent Call of Duty: Ghosts, the latest installment in a line of Call of Duty games that have been extremely profitable for the company. With 6.5 million units sold the first day of the game's release, Call of Duty is already beating out EA's rival release even before Chinese numbers were excluded. With growing numbers in China, and competition from Activision who now gets to operate in the Chinese market with one less competitor, EA seems to be losing this battle.
EA is still gaining from the Chinese market with other games, however. In the company's Q1 FY14 earnings release last June, the company announced a new partnership with Chinese company TenCent for distribution of FIFA Online 3 in China. This partnership and the tied revenue has been a highlight of the companies lackluster performance over the second half of 2013, and with the coming world cup, could see increased sales for the struggling game maker. Additionally, it's possible that if news of the Battlefield 4 ban spreads on the Chinese blogosphere, the event could prove to be a good word-of-mouth marketing for the company in China from government critics. However, these are big what-ifs that shouldn't form the basis of an investment decision.
Investor take away: Game over for EA
Unless more promising games are announced in EA's pipeline in 2014, there is little reason to think this company will be a major winner in the online gaming market in 2014. Don't pull the plug on gaming stocks, there are better plays for your money.
EA's rival Activision has shown to be a strong player, drawing revenue from well thought out series releases and expansion packs to existing games. Though also struggling with a 3Q loss this year, this company has seen continuous net income growth over the previous three years. Additionally, the company's P/E of 17 looks much more affordable than EA's 31.
Another great play from within China is NetEase (NTES 4.11%). This gaming giant is the biggest player in the Chinese market, and is enjoying continuing revenue growth up 18% in the third quarter over the same quarter last year. Revenue increases, up from the previous quarter as well as year over year, have been due to an impressive pipeline of games that resonate with the Chinese market and other Asian countries. NetEase has announced continuing development of a 3D fantasy gamed called Revelations, which is set to hit the Chinese market, and expand into Korea, in the next year which could prove to be a major boost to the company and industry this year because of its industry leading technical features.
Here's another top play
These online gaming companies are two examples of well researched and analyzed stock picks.
