Three drivers of Electronic Arts’ growth – and why they bode well for its future
Electronic Arts (EA) is a top performing stock this year – but that’s nothing new. Over the past five years, the company’s share price has appreciated by a dramatic 740%. What’s driving those gains? Three things: the digitization of video games; increasing engagement amongst players for EA’s games in particular; and successful moves by the company in scaling its developmental efforts.
EA’s share price is up 53% so far, year to date
SOURCE: Yahoo Finance
The digitization of video games means that consumers are increasingly cutting out middlemen at shops like GameStop, and buying titles directly from publishers online. These games are then downloaded onto consoles and computers, eliminating the need for physical copies. It’s faster, easier, and in some cases, cheaper, than the traditional way people purchased video games. And EA has been one of the most successful companies when it comes to managing this transition. Chief financial officer Blake Jorgensen said:
“While there's high-bandwidth speeds in the United States and in key major countries like the U.K. or France or Germany, that's not consistent all through Europe or Eastern Europe or Asia. And so that's probably still the biggest impediment to full game downloads. And the second piece is, while we in the U.S. and I think it's the same in Northern Europe and in some parts of Europe, the cashless credit or cashless transaction methods are fairly well developed. I would say they're not as well developed in other places in the world. So the use of credit cards, PayPal, any type of e-pay approach has still got a long way to go.”
He also said that the company doesn’t see any “consumer resistance” to digital downloads – they prefer them. This strongly implies that the room for growth in digital downloads. In the quarter that ended June, 34% of the company’s game sales on consoles were delivered in this way. That’s a number that common sense says will rise.
Another shift in the video game industry is towards in-game purchases and subscription-based online gaming. This means that customers remain engaged with games throughout their entire lifecycle. This is an important development: historically, players have been most engaged with games for the first three months or so after they’re released. EA’s CEO Andrew Wilson recently broke down what kind of difference this makes to the number of players the company can count on:
“Ultimate Team grew 11% year over year through Q1. In our mobile businesses, FIFA Mobile expanded to more than 95 million unique players, and NBA Live Mobile grew to more than 70 million unique players. Our Sims community continues to be strong: Monthly active players in The Sims 4 increased more than 20% year over year in Q1, and we're excited to have a new Sims mobile game in soft launch. And in Battlefield 1, our community has grown to 21 million unique players experiencing an extensive live service, with monthly updates, in-game events and missions, and the largest expansion packs in franchise history.”
EA is not just outperforming in regards to wider industry trends: it’s also making strides as a business. The company has been focusing on its developmental cycles in recent years, debuting its “frostbite” gaming engine. This engine powers a multitude of the company’s games. In simple terms, it massively reduces the development of each individual game – rather than build a separate underlying infrastructure for each title, EA has created one powerful, versatile, set of code that can be adapted to whatever its developers need to tell their story. The result is better games created more quickly. Wilson explains:
“EA's investments in engine technology, analytics, infrastructure, and research continue to fuel advancements in our games, our services, and our player network. Our industry-leading Frostbite engine is now powering development of a dozen new titles across our portfolio. It is continually engineered alongside our world-class technology platform for games and services, enabling our creative teams to leverage sophisticated data and insights to conceptualize and build the most incredible new experiences for our players.”
EA is in an incredibly good position to harvest the benefits of a number of positive trends in the video gaming industry. As that industry continues to grow into the world’s dominant form of media, they are becoming harder and harder to displace.
Dominion holds Electronic Arts in its Global Trends Ecommerce Fund.
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