How Much Can Electronic Arts Grow By 2019?

by Trefis Team
Electronic Arts
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Electronic Arts (NASDAQ:EA) has reinvented its business strategy, now focusing on releasing fewer titles but improving the hit rate. In the same quest, the company has focused on improving alternative revenue streams such as the revenue earned from in-game services including downloadable content and in-game purchases. This has largely worked, to the extent that these revenues are now nearly as large as EA’s primary revenue source: sales of gaming titles. This trend is likely to continue, and we expect strong growth for the company in the next few years. Take a look at our interactive breakdown of EA’s business, which shows how different business metrics are likely to trend in the coming years.

Our price estimate for EA stands at $107, implying a slight discount to the market price.

Electronic Arts’ Net Income & EPS Can Increase Roughly 20-25% In The Next 2 Years

Strong Growth Expected In Product And Service Revenue

The growth in EA’s Product Revenue and Service Revenue will be driven by its focus on digital content, replication of ultimate team modes in games other than FIFA to promote in-game revenue, the dominance of FIFA and a sales boost due to the World Cup in 2018, and expansion in the first-person-shooter market. While this is unlikely to happen in the next two years, we expect EA’s Service Revenue to overtake Product Revenue over the long run as the installed base widens. EA is focusing on making the most of its existing franchise titles, and we expect that it will be able to do so.

Product Gross Margin Will Improve, Service Gross Margin Likely To Remain Flat

While EA’s Service Gross Margin is already quite high, we expect its Product Gross Margin to improve going forward as higher-margin full game downloads continue to gain in popularity. In the quarter ending September 2017, full game download revenues grew by 31% and accounted for 27% of EA’s product revenue. In addition, we believe that the company’s R&D and SG&A expenditures are likely to be lower going forward, as it focuses on incremental changes to already popular titles. 

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