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Should I Buy Electronic Arts? 3 Pros, 3 Cons

The video game stalwart has a lot going for it — and a cheap valuation to boot

   

ElectronicArtsLogo e1285772066317 Should I Buy Electronic Arts? 3 Pros, 3 ConsIt’s been a horrible year for  video game operators. Just look at Electronic Arts (NYSE:EA). So far this year, the shares are off 43%.

Yet the company has shown that it can make some nicely bullish moves. Last year, for example, EA’s shares were up 26%.

So does it make sense to pick up EA shares now? To decide, let’s take a look at the pros and cons:

Pros

Pioneer. EA got its start back in 1982. While it has had some tough times, the company has shown that it can find ways to keep up with the fickle tastes of gamers. First EA made the transition from the PC to consoles, and now the company is doing the same with social games and mobile.

Diverse Platform. Gamers expect a high-quality experience, which means a title can cost millions. In fact, the games are often on par with new feature films.

EA has the advantage of multiple channels to help reduce risk. Besides having games for the top consoles — such as Sony’s (NYSE:SNE) PlayStation 3, Microsoft’s (NASDAQ:MSFT) Xbox 360 and Nintendo’s Wii — the company has also built strong positions on Facebook (NASDAQ:FB), on smartphones and even on Apple’s (NASDAQ:AAPL) iPad.

Content. Here, EA is king. EA understands how to develop titles that engage gamers. A big part of its strategy is to leverage well-known brands, such as Madden NFL, FIFA and Harry Potter.

But EA has also been smart in acquiring hot startups, especially in the social and mobile sectors.

One key deal was for PopCap Games, the developer of top-notch online titles such as Bejeweled, Plants Vs. Zombies and Zuma.

Cons

Volatility. Take a glance at EA’s stock chart — you’ll notice that it looks like a roller coaster. Then again, gaming is a hits-driven business. Even with lots of research — and relying on top brands — a title can easily turn out to be a dud.

New Models. The console business is fairly mature, with much of the growth these days coming in mobile and social platforms. The transition has not been easy for EA. Let’s face it, the revenue models are different. They require getting huge numbers of users and getting only a small number to pay a fee for in-app purchases.

Macro Economy. Unfortunately, the U.S. economy is showing more signs of a slowdown. No doubt, this will likely be a drag on sales of video games, which are a discretionary item.

Verdict

EA has a big advantage over rivals via its multichannel distribution system as well as its experience in leveraging hot brands. Growth prospects for social and mobile gaming look promising, and the company’s investments in these categories should get traction over the next couple of years.

EA is also selling at a cheap valuation right now, at about 0.9X revenues. This compares to 3.4X for Zynga (NASDAQ:ZNGA) and 2.8X for Activision Blizzard (NASDAQ:ATVI).

So in light of all these factors, the pros outweigh the cons on EA stock for now.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO.  Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/06/should-i-buy-electronic-arts-3-pros-3-cons/.

©2014 InvestorPlace Media, LLC

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