Video game maker Electronic Arts Inc. (NASDAQ:EA) has been on a tear so far this year with the stock gaining nearly 50% to trade at all-time highs. With EA stock flying high, many are wondering whether or not it’s time to take profits and a breather, but I’d argue that Electronic Arts has higher to climb. The firm’s most recent earnings report showed impressive revenue growth and healthy cash flows that are likely to continue expanding.
There are a lot of big things happening in the gaming space at the moment, and EA appears to have its finger on the pulse of a new generation of gamers. While the firm’s 14% revenue increase and 46% earnings growth was a huge vote of confidence for the stock, those figures are made even more impressive by the fact that the firm didn’t even have a big game launch to pad those figures — that’s just business as usual for EA.
Digital Sales Are Up for Electronic Arts
Perhaps the biggest reason EA stock has been on the fast track to the top is the firm’s ability to grow its digital spending. By focusing on things like in-game purchases and digital downloads, Electronic Arts has been able to increase customer spending steadily without bringing out any hot new games. That means margins are much higher because things like research & development and marketing costs are significantly lower.
Digital sales makes up more than half of EA’s total revenues, and that percentage will hopefully continue to grow because it means that the firm can side-step distributors and sell directly to gamers through their consoles. The in-the-moment sales also mean the firm capitalizes on impulse buys, particularly with in-game purchases.
Of course, EA isn’t the only one generating income from digital sales. Competitors like Activision Blizzard, Inc. (NASDAQ:ATVI) and Take-Two Interactive Software Inc (NASDAQ:TTWO) are doing the same, but what I like about EA stock over the other two is Electronic Arts’ focus on sports games with its Madden and FIFA franchises.
E-Sports Are Growing
Gaming has morphed into much more than a hobby and the potential growth opportunities in e-sports have become a big reason to invest in companies like EA. Competitions among professional gamers have grown into major events, drawing not only video game aficionados but large audiences as well.
In the past, these competitions were simply a way for game makers to generate interest in a particular franchise, but with e-sports gaining traction further and further outside the gaming circle, it could be a great way to hook in new customers.
EA stock is poised to grow alongside e-sports because the firm has pledged to grow its competitive gaming arm throughout the next year. Electronic Arts sees a greater number of competitions coupled with original programing and more broadcasting outlets as a way to expand its network through e-sports.
EA’s efforts to expand its competitive gaming profile can only be enhanced by the fact that several of the firm’s most popular franchises are based on mainstream sports that draw large viewing audiences. While sports games are not currently the biggest draws among e-sports, there’s plenty of room for growth.
Virtual Reality
Another big reason EA stock is worth picking up is that the firm stands to gain from advances in virtual reality technology. One of the big benefits of a new technology like VR is that it has the potential to entice people who may not have been interested in video games to try them out.
Electronic Arts has access to the kinds of technology needed to create high-quality virtual reality experiences, and when you combine that with the firm’s portfolio of novice-friendly sports games, I think you have a huge opportunity to grab new players.
The Bottom Line for EA Stock
EA stock has been on a tear, but the company still has further to grow. I love the fact that the firm has been able to grow its revenue significantly while reducing margins by increasing digital sales. I also like that the firm has excelled despite not having any big new releases — that bodes well for when new games do hit the market.
EA’s transition to a completely digital sales model appears to be a winning decision, and I think the benefits will continue to add up as the firm makes the switch.
Not only do I think that EA’s portfolio, specifically sports-based games, are great catalysts for the firm’s growth in competitive gaming and virtual reality, but EA stock is relatively cheap when you consider its price-to-earnings ratio of 37.9 compared to ATVI’s 45.3.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
