How Can Introduction Of More FPS Titles By EA Impact Its Stock?

+14.46%
Upside
132
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Trefis
EA: Electronic Arts logo
EA
Electronic Arts

Electronic Arts (NASDAQ:EA), the leader in the sports games genre, has changed its business strategy over the last 3 years, to developing fewer number of titles throughout the year, and to focus on improving their existing franchises rather than releasing numerous other small titles. As a result, the company enjoyed improved margins, with more energy and investment to further provide the gamers with better game features. In the case of Electronic Arts, the number of titles released per year decreased from 56 games in 2010 to 11 games in 2014. EA’s “hit rate”, the percentage of games in the top 100 list, improved from 23% in 2010 to 68% in 2013. However, the figure dropped to 55% in 2014, due to the absence of the Battlefield and Need For Speed franchises.

EA’s strength is its sports titles, FIFA and Madden NFL, both of which are the most popular sports titles in their respective geographic regions. Furthermore, 2014 was even more special for FIFA fans, as the company released a special edition of its soccer title: 2014 FIFA World Cup Brazil, ahead of the FIFA World Cup held in June. FIFA 15 was also given an overwhelming response by the fans, making it the second highest selling title worldwide in 2014. On the other hand, Madden NFL was the highest selling sports game in the U.S. in 2014. Over the last couple of years, the company is putting efforts to enter into the First-Person Shooter (FPS) genre, with its Titanfall and Battlefield franchises. However, Activision Blizzard (NASDAQ: ATVI) still remains the leader in the FPS genre, with its highly popular Call of Duty franchise. Shooter games are growing in demand, as the new storylines and high quality graphics are attracting more gamers.

Our $54 price estimate for Electronic Arts’ stock is 8% below the current market price.

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See our complete analysis of Electronic Arts stock here

Trefis’ estimate for the EA stock is roughly 8% below the current market price. Considering all the industry and company trends, as well as the current financial condition of the company, there is one probable scenario that can impact the company’s stock price.

Improving Market Share In FPS Category

In 2014, EA released just one FPS title: Titanfall in March and it sold just 3.7 million units on next generation consoles till December 2014, whereas Activision’s Call of Duty: Advanced Warfare was released in November and it still managed to sell 9.5 million units on next generation consoles. This clearly indicates the dominance of Activision’s Call of Duty in the segment. In 2014, Activision’s market share in the shooter category was 66%, whereas Electronic Arts’ market share was just 16%.

Electronic Arts would certainly want to tap into this market by introducing new FPS games in the future, as well as by releasing annual editions of Titanfall and Battlefield franchises. Let us take a scenario, where the company aggressively introduces FPS games in the coming 5-6 years.

  1. In March 2015, Respawn Entertainment, the developers of Titanfall, confirmed that the sequel of this game is in development, but has not yet announced the release date. [1] Let us say Titanfall 2 is released close to November, just before the holiday period, giving the title 2 months till the end of the year. Titanfall sold 2.75 million units in its first 8 weeks on Xbox One, PS4, and PC. [2] Considering the sales of titles gets 1.5X to 2X in November and December, it is safe to assume that Titanfall 2 might sell close to 4 million units in 2015. Moreover, Battlefield Hardline was released on March 17, and has gained a lot of attention, since it is the first major shooter game release of the year. Battlefield 4 sold close to 3.5 million units in 2014, which was the year when software sales were low. Taking a conservative estimate, we can say Battlefield Hardline might sell close to 4.5 million units in 2015. This would mean 8.5 million units from two FPS titles. Apart from shooter and sports titles, EA’s other titles account for another 4.5 million units on average. Since 2015 will witness a new Need for Speed title as well, we can say other titles might add up to 14 million units (8.5+4.5+1).
  2. After 2015, let us assume that the company releases Titanfall and Battlefield titles annually, and releases one more franchise in the next 3 years thereafter.

Currently Trefis forecasts the number of game titles other than FIFA and Madden to remain 11 till the end of our forecast period. However, in the above mentioned scenario, this might go up to 14 by the end of 2021, if the company sticks to its present business strategy.

Moreover, Trefis’ forecast for the number of units sold per title is 1.16 million per title for the year 2015 and 1.4 million per title by the end of 2021. In case of the above scenario, this figure might jump to 1.27 million units per title in 2015 and 1.67 million units per title by the end of 2021.

This whole scenario would lead to 11% upside to our price estimate, and a significant improvement in the company’s market share in the shooter category. Moreover, according to our estimates, it would provide a significant boost to the segment’s gross profit as shown below.

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Notes:
  1. Titanfall 2 confirmed, coming to Xbox One, PS4 and PC []
  2. Titanfall, VGChartz []