Electronic Arts (NASDAQ:EA)is having a fine year, with shares are up more than 80% so far in 2014. Although the video game publisher is trading near a six-year high, the stock could have further upside.
Below are three scenarios that could send Electronic Arts' shares even higher. It's important to note, however, that there's no guarantee shares will continue to rally. A market downturn could always send the stock plummeting, regardless of its underlying business. Nevertheless, investors would likely welcome the following possibilities.
More revenue shifts to digital
Historically, the majority of Electronic Arts' games have been delivered in a physical format -- discs or cartridges sold directly to customers. Discs still compose the bulk of Electronic Arts' revenue, but there has been sizable growth in digital distribution platforms. Last quarter, for example, about one-third of the company's adjusted net revenue came from digital streams.
Management believes digital will eventually comprise 100% of EA's business, though it has given no specific timetable for this to occur.
Still, the steady growth of digital distribution should act as a tailwind for Electronic Arts' business -- digital games are often sold at higher margins than physical versions, and the secondary market is nonexistent.
Battlefield Hardline and Dragon Age: Inquisition exceed expectations
Obviously, as a publisher of video games, Electronic Arts lives and dies by the success of its titles. Core franchises such as Battlefield, Madden NFL, and FIFA generate a sizable portion of Electronic Arts' revenue and earnings.
In the near term, Electronic Arts investors should be mindful of two titles in particular: Battlefield Hardline and Dragon Age: Inquisition.
The third installment in the Dragon Age series will make its debut on Nov. 18, and could set sales records. As a role-playing game, it might not offer the sort of mass appeal as a Call of Duty or Grand Theft Auto installment, but it could be one of the most highly regarded games to go on sale this holiday season. The PlayStation 4 version of the game holds an 89 rating (out of 100) on review aggregator Metacritic, making it the third-best reviewed PlayStation 4 title in the console's (admittedly short) history.
Battlefield Hardline won't go on sale until March, but it's the title Electronic Arts' investors should look to after Dragon Age: Inquisition. Originally expected to debut this month, the game was pushed back for additional polishing. If that polishing results in a similarly impressive Metacritic score, it could translate into strong sales.
EA Access comes to PlayStation
Finally, Electronic Arts would benefit if Sony allowed its new subscription service -- EA Access -- on the PlayStation 4.
Electronic Arts has not released specific membership figures, but management was quite happy with Access on its last earnings call.
For a flat fee ($5 monthly or $30 annually) EA Access subscribers receive access to a "vault" of older Electronic Arts titles. Currently, EA Access is restricted to the Xbox One, which limits its success, as the Microsoft console has been strongly outsold by the PlayStation 4. Sony rejected the service, arguing that it did not provide good value to its customers (it also might compete with some of Sony's own services).
But if Sony were to allow EA Access on the PlayStation 4, Electronic Arts could pick up millions more subscribers. There's no guarantee this will happen, but Electronic Arts' management did not dismiss the possibility when questioned about the matter on the company's latest earnings call.
A growing base of EA Access subscribers benefits Electronic Arts. It brings in more revenue, allowing the company to monetize older games that might no longer be selling at retail, and could spur purchases of newer Electronic Arts titles by making it easy for gamers to sample older installments.
Getting on Sony's console would be a big win for Electronic Arts and its shareholders.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.