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Can Electronic Arts Continue to Benefit From the Console Cycle?

By Mukesh Baghel - Mar 24, 2014 at 11:00PM

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Electronic Arts has done better than Activision Blizzard in terms of stock performance, but will this continue?

The new console cycle has started off well, giving game publishers such as Electronic Arts ( EA 0.17% ) opportunities for revenue growth. And since EA provides certain exclusive titles to Microsoft ( MSFT 0.01% ), it can ride the software giant's future console surge.

Beyond the short-term pain
EA, though, saw a decline in revenue in its third-quarter results. The drop can be primarily attributed to weak demand linked to the launches of new video game consoles near the end of 2013. Most of EA's games were focused on the previous generation of consoles, rather than on Sony's next-generation PlayStation 4 and the Microsoft Xbox One 

But the PlayStation 4 and the Xbox One are ultimately expected to be strong catalysts for EA. Its games such as FIFA 14, Battlefield 4, Madden NFL 25, Need for Speed Rivals, and NBA LIVE 14, which are compatible with the new consoles, have performed ahead of expectations so far.

The way ahead for EA
Microsoft and Sony have together sold more than 10 million units of their next-generation consoles. Now it's time for third-party game makers to set themselves up to benefit from this cycle. Electronic Arts' Battlefield 4 was one of the top 10 highest-selling games in February. Meanwhile, the company's Titanfall shooter title has gained huge attention.

Due to a deal with Microsoft, Titanfall will only be available on Windows-based products. The game's exclusivity to the Xbox One and Xbox 360 means it will be exposed to fewer players. However, this shouldn't worry investors. Halo was successful despite being available only on the Windows platform, and there's no reason to believe that the well-reviewed Titanfall can't repeat the success.

Microsoft has launched a Xbox One Titanfall bundle that costs the same as the original Xbox One ($499) but comes have a free download of Titanfall, which separately costs $59.99, and a complimentary Gold Xbox Live membership for a month. This deal will certainly benefit EA as many Xbox One buyers going forward will want this bundle

In addition, EA's mobile sales are gaining momentum, hitting a company-record 71 million games downloaded in December. With the increasing shift of users toward mobile and Internet games, Electronic Arts is focusing more on improving its efforts in this area. The Simpsons hit a record number of daily active users in the holiday season, while The Sims FreePlay delivered its largest-ever revenue in the month of December.

A few concerns
Due to strong competition from peers, success is not guaranteed for EA. The launch of Battlefield 4 was troubled as gamers complained about the Need for Speed movie ads seen during game play. Furthermore, Titanfall will face potential competition from Activision Blizzard's latest (NASDAQ: ATVI) Call of Duty game.

Call of Duty: Ghosts was launched in November and made available across all gaming platforms. First-day sales came in above $1 billion, beating Grand Theft Auto V.While Titanfall is officially the best-selling game this year so far, the platform limitations are a challenge for EA. 

Foolish takeaway
EA has outperformed Activision when it comes to share price performance this year, and it has made promising progress with Titanfall after the Battlefield 4 goof up. Strong mobile downloads, a host of new games, and smart bundling strategies with Microsoft's Xbox One could help EA even more as the console cycle progresses.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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