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Investment Overview for Electronic Arts (NASDAQ:EA)
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Below are key drivers of value that present opportunities for upside or downside to the current ${trefisprice}.
Microsoft Consoles
- Microsoft Console Revenue:
Microsoft console revenues have increased from $578 million in 2009 to $1,146 million in 2011. Going forward we expect the divisional revenue to increase to $1,595 million by the end of the Trefis forecast period.
If Microsoft console revenues increase to $2 billion by the end of the Trefis forecast period, there could be a 5% upside to the Trefis estimate for Electronic Arts. On the other hand, if it decreases to $1,180 million, there could be a 5% downside to the Trefis estimate.
Sony Consoles
- Sony Console Revenues:
Electronic Arts' Sony console revenues have increased from $687 million in 2009 to $1,101 million in 2011. The increase was primarily due to the strength of EA's titles such as FIFA 10, FIFA 11, FIFA 12, Madden NFL 11, Madden NFL 12, Battlefield 3 and related downloadable content (DLC) on Sony PS3. However, a simultaneous decline in EA's PS2 revenues has offset this growth. Going forward we expect the divisional revenue to increase to $1,420 million by the end of the Trefis forecast period.
If Sony console revenues increase to $1,800 million by the end of the Trefis forecast period, there could be a 5% upside to the Trefis estimate for Electronic Arts. On the other hand, if it decreases to $1,030 million, there could be a 5% downside to the Trefis estimate.
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Electronic Arts (ERTS)
is an international developer, marketer, publisher and distributor of games for video game consoles, personal computers, mobile phones and the Internet. Currently, EA's most successful products are sports games published under its EA Sports label (such as FIFA,Madden NFL, NHL, NBA Live, Tiger Woods, etc.), games based on popular movie licenses such as Harry Potter, and games from long running franchises such as Need for Speed, Medal of Honor, The Sims etc. The company generates nearly 55% of its revenues from video game sales in the US and another 35-40% of its revenues from video game sales in Europe.
- Video game revenues are primarily generated from the sale of video games - a typical game sells for $50-$60 at launch.
- EA develops, publishes and distributes games. Typical margins for each stage of the business are
- Development & Publishing ~50-60%
- Distribution ~25-35%
- Royalties to hardware manufacturers (such as Xbox, PlayStation and Wii) ~20%
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Franchise games
Franchise games are the video game equivalent of movie sequels. Most notable franchise game series released by EA include FIFA, Need for Speed, SimCity, Medal of Honor, Madden NFL, The Sims, Battlefield etc. These games generate high margins because:
- R&D requirements are lower as the games are not developed from scratch. Only incremental changes are made most of the time.
- SG&A requirements are lower since the games are already popular among the gaming community.
- Lower direct expenses also contribute to higher profit margins for franchise games.
Online games
Online games (notably Massively Multiplayer Online Games (MMOGs)) have become immensely popular. Star Wars: The Old Republic (SWTOR) is one such example of an MMOG released by EA. We believe that MMOGs also offer high margins because:
- Incremental spend on servicing a paid subscriber (bandwidth and storage, overhead) is much lower than the typical $120-$150 annual revenue obtained from each subscriber.
- Because of the community nature of MMOGs, there is a lot of loyalty associated with popular games. Once registered as members, gamers are constantly driven by competition to establish themselves as high scorers within the online gaming community. This continuous fan following prevents gamers associated with a popular MMOG from suddenly switching over to a new game that hits the market.
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Gaming industry changing landscape from retail to digital
The video gaming industry has been changing from retail to digital. This is evident by the fact that a growing number of games are now published digitally. Casual browser based gaming and mobile gaming have become a significant part of gaming revenues and are expected to continue to perform in the future.
Electronic Arts has also changed its strategy to focus its sales through a mix of retail and digital gaming products.
Emerging new platforms such as smartphones, tablets and social networking sites
The increasing digitization of the video gaming industry has ensured that video games won't stay limited to consoles and handhelds. Smartphones, tablets and social networking sites are emerging as serious gaming platforms. EA is now increasingly focused on developing its mobile, social, and free-to-play browser games channels.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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