Apart From China, Where Else Can EA Expand?

by Trefis Team
+11.40%
Upside
108
Market
120
Trefis
EA
Electronic Arts
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It has been often talked about how Electronic Arts (NASDAQ: EA) can tap the Chinese market to fuel growth going forward. China’s 50-point plan to turn the country into an $813 billion sports industry, with a special focus on developing soccer, could be a boon for EA. Sales of its largest game FIFA are primarily tied to the popularity of soccer, so growing popularity in China should benefit the company greatly. But that’s just one part of the growth equation. Another, and perhaps even more important, part is leveraging the industry-wide shift in focus from unit sales to in-game transactions and long-term player engagement. EA is already doing this quite well for its FIFA franchise, where players spend to create an elite team. There is a significant opportunity in expanding this and other ideas to promote in-game spending in non-sports titles where EA has lagged behind somewhat.

Our current price estimate for Electronic Arts (EA) stands at $120, which is nearly in line with the market.


The market is clearly valuing user engagement, and the industry model is focusing more on increasing the shelf life of existing titles by providing more downloadable expansion content. EA’s and rival Activision’s market caps have jumped more than 50% this year, which can largely be traced to acceleration in revenues from in-game purchases. In the fiscal year ending March 2017, EA’s services revenue grew nearly 16% year-over-year, compared to less than 6% growth observed in its product revenue. The ‘Services’ segment includes in-game purchases, subscriptions and other ongoing revenue streams. EA’s ultimate team feature in FIFA generates nearly $800 million a year in in-game revenue, which is impressive but still pales in comparison to what Activision generates from World of Warcraft with its subscription model – something that it employs on top of selling the game’s titles. EA wants to replicate this success with some of its other games, which could be a powerful trigger for the company’s growth. Overall we are positive about the growth potential of the gaming industry, and expect the revenue patterns to be less erratic as in-game transactions and subscription models become a bigger part of the ecosystem.

EA’s services revenue per unit sold is currently around $60, and we forecast it to reach $100 in the next 5-7 years. However, the figure is still far behind $200 subscription revenue per subscriber for World of Warcraft, which is often touted as a poster child of games epitomizing user base loyalty and engagement. Of course, inherent differences in the nature of the games and player bases mean that it is unrealistic for EA to achieve that per user or per title service revenue figure of $200. However, if it can manage to grow this figure to $150 instead of $100 as we forecast, it would imply a nearly 25% upside to our price estimate for EA.

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