Electronic Arts’ Stock Surges Due To Impressive FIFA & Madden NFL Performances
The strategy of the American gaming giant, Electronic Arts (NASDAQ:EA), paid off well, as the company reported remarkable results in its third quarter earnings report released in late January. Over the last four years, the company has decided to release a lesser number of more impressive games, thus concentrating more on its core franchises and developing new content for the avid gamers. In the third quarter, the company reported non-GAAP net revenue of $1.43 billion, which was 12% above the guidance, but down 9% year-over-year (y-o-y). The year-over-year decline is primarily due to strong performance in Q3 2013, driven by the launch of Battlefield 4, which sold more than 3.6 million units on PlayStation devices and nearly 3.54 million units on Xbox devices in the holiday period of 2013. [1] On a trailing twelve month basis, EA’s non-GAAP net revenue reached $4.337 billion, and digital receipts accounted for more than half of the revenues ($2.178 billion) for the first time ever, and up 17% y-o-y. The company’s core sports titles: FIFA 15, Madden NFL 15, and Hockey Ultimate Team services recorded a massive 82% y-o-y growth, making it the #1 publisher on all the major platforms in the world in 2014. [2]
EA’ s stock has jumped from $43 to $57 during the last three months, driven by a strong holiday period.
Our $54 price estimate for Electronic Arts’ stock is 5% below the current market price.
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See our complete analysis of Electronic Arts stock here
FIFA Steals The Show In Holiday Quarter
Over the last decade, EA’s dependence on its sports titles, especially FIFA, has increased manifold. The gaming industry has been witnessing a change in trend as the gamers now opt for downloadable digital content games rather than physical software sales. According to the research group NPD, the net software sales for December 2014 reached $1.25 billion, down 2% year-over-year. [3] However, the strong console demands among the users drove the hardware sales, resulting in an 18% y-o-y increase in physical hardware sales, which were strong enough to offset the 13% y-o-y decline in the software sales. The figures clearly indicate the strategy of top game developing companies, where they focus more on core franchises and so releasing a lesser number of titles.
In this scenario, EA was betting on its top franchise, FIFA, to over-perform and contribute significantly to the company’s revenue stream. Furthermore, 2014 was a special year, as the excitement among soccer fans grew due to the FIFA World Cup in Brazil last year. Just before the World Cup, the company gifted its FIFA fans with the new special edition: 2014 FIFA World Cup Brazil, which sold close to 3 million units in the first four weeks on both the major consoles. The game provided an extra boost to the enthusiasm among the fans for the regular annual edition: FIFA 15. Soccer enthusiasts prefer to play either FIFA or Konami Digital Entertainment’s Pro Evolution Soccer (PES). However, the latter is still not that popular, but is the closest competitor to the FIFA soccer franchise. EA released the latest FIFA 15 worldwide in the last week of September 2014. The game sold nearly 5 million units in the first week of the release. According to VGChartz, FIFA 15 sold over 13.38 million units through January 31, with Sony’s PlayStation 4 and PlayStation 3 leading the FIFA sales with 5.25 million and 3.9 million units, respectively. On the other hand, FIFA 15 sales on Xbox 360 and Xbox One were nearly 2.5 million units and 1.63 million units respectively. [4]
However, last year, FIFA 2014 also contributed to the revenues, as the game sold 4.3 million units on all the platforms (Xbox, PlayStation, Wii, PC) and handhelds. In 2013, the company managed to sell close to 14.69 million units of FIFA titles worldwide. According to the trend, FIFA sales grow significantly during the World Cup year, and hence the same was witnessed last year with a total of 18.68 million FIFA unit sales, an increase of 27% y-o-y. With such strong demand for the title, the company remains positive of its performance in the coming years.
Trefis estimates the FIFA unit sales to increase mildly in 2015, but in 2016, it might get a huge boost again due to the UEFA Euro 2016 Championship.
Madden NFL: A Significant Contributor
America’s favorite sports title, Madden NFL, was the #2 selling title in North America in 2014. Madden’s game-play hours increased 30% y-o-y last year. According to VGChartz, the game sold 6.42 million units in 2014, up 58% from 4.05 million units in 2013, with North America accounting for 87% of the total sales. [5] Both FIFA and Madden NFL still accounts for more than 87% of the total sports titles sold in 2014, and might continue to be the money minting franchises for the company. With the absence of NCAA Football series, the gamers who prefer American football are opting for Madden NFL.
Trefis estimates the Madden NFL unit sales to reach 10 million units per year at the end of our forecast period.
Comeback Of Popular Franchises To Drive Growth
Electronic Arts released 8 new titles in 2014, excluding FIFA and Madden NFL series, out of which four made it to the top 100 titles in 2014. As a result, the company’s “hit rate,” the number of titles in the top 100 selling games relative to their annual titles released, dropped down to 50% in 2014 from 68% in 2013. Among these top four games, Battlefield 4 and Titanfall were the company’s only entries in the shooter genre. Titanfall was off to a great start after its release, but the interest of gamers declined in the title after the release of Activision’s Destiny and Call of Duty: Advanced Warfare. Titanfall managed to sell only 3.7 million units in 2014, even though it was released 6 months before Destiny. This indicates that Electronic Arts still needs to come up with stronger shooter games to match the strength and dominance of Activision Blizzard in this genre.The point to remember is that EA was without a new Battlefield and Need For Speed title in 2014. In 2015, EA will come up with Battlefield Hardline and Need For Speed.
Trefis estimates the total number of titles, except FIFA and Madden NFL, released by EA to be 11 in 2015. Also, some of the games are popular worldwide, and might make it to the top 100, taking the hit rate back to 65%. Moreover, as the company focuses on improving the present titles rather than coming up with several new titles, the capital expenditure growth might slow down.
Trefis has revised its EA price estimate from $39 to $54, after taking all these factors into account.
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