Under the Spotlight Wall St: Electronic Arts Inc. (EA)

One of gaming’s most well known companies, Electronic Arts revolutionised sports gaming and became one of the industry’s biggest cash cows. Let’s put it Under the Spotlight.

Founded by a former Apple employee when Apple was just a small startup, EA ($EA) was one of the first companies to recognise the potential of the emerging video game market, eventually becoming a leader in the development and publishing of games for home computers and consoles. In the early years of the company, EA focused on developing and publishing a wide range of games, including sports, role-playing, and strategy games.

One of the company's first major successes was the Madden NFL franchise, which was released in 1988 and quickly became a best-seller. EA also had success with other sports games, such as NHL, NBA Live, and FIFA, which helped to establish the company as a leader in the sports gaming genre in particular.

Yet despite sports games being one of their key markets, it is definitely not the only one in which EA holds a firm grip. The game developer also produces titles such as The Sims, Battlefield, and dozens of other games. Among them is the battle royale sensation, Apex Legends, currently one of the top 10 most popular games on the game streaming platform Twitch.

One penny at a time

EA's business strategy is focused on expanding its reach and engaging its players through a variety of channels. The company has made significant investments in digital distribution, which allows it to reach a global audience and monetise its content through in-game microtransactions and subscription models. EA is also focused on building a network of players through its EA Play subscription service, which offers access to a library of games and other benefits.

Hated by some gamers, loved by others, microtransactions have become EA’s bread and butter with over US$1.1b of its revenue in the quarter ended in September 2022 coming from live services, which are mostly in-game transactions. Only about half that amount (US$635m) came from the sale of new games. Microtransactions also make for huge margins. EA’s gross profit margins averaged at circa 75% for the last five years, almost 50% more than its peers in the gaming industry.

Keeping up with the times

Even though EA made its fortune and fame on consoles and PCs, the company’s fastest growing segment is mobile, totalling US$320m of net revenue in the last quarter, representing 27% growth YoY. Mobile should continue to be one of the gaming giant’s top priorities if they want to get a bigger share of a US$103b market.

EA has to deal with the highly competitive and rapidly evolving nature of the gaming industry. The company faces strong competition from other major players, such as Activision Blizzard and Take-Two Interactive, as well as smaller independent studios. In addition, the gaming industry is subject to technological disruption, and EA must continually invest in research and development to stay ahead of the curve.

The company’s most beloved franchises are somewhat old, which might lead one to believe that EA might be losing its creativity - or even worse, its profitability - but these beliefs are likely to be ill-founded. In the next two quarters it will launch seven new games, two of those being completely fresh, and the launch of FIFA23 has had the best sales in the history of the franchise, according to the last earnings conference.

EA has several opportunities to continue growing its business. The global gaming market is expected to continue expanding, and the company's strong intellectual property portfolio and partnerships with major sports leagues and franchises provide opportunities to expand its offerings and reach new audiences. For FY 2023, EA expects net revenue to be between US$7.55b and US$7.75b, an increase of +10% YoY. Just like its slogan, EA seems to still be well and truly in the game.

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.


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