Game publisher Electronic Arts (NASDAQ:EA) is still growing, and its stock price is up 31% over the last year. But some are starting to worry about EA stock.
Are publishers going to be disrupted like GameStop (NYSE:GME)?
Before GameStop became a meme, it was a failing chain of storefronts selling video games and related products. It was disintermediated by electronic game distribution. This had it hurtling toward bankruptcy before small traders staged a short squeeze on hedge funds riding it down.
The question now is whether cloud gaming, where games are played online, might do the same thing to equities like EA stock.
The Cloud Game
So far, EA is acting like there’s no problem. It sees cloud gaming as just another revenue stream.
EA at $142 with a market cap of $41 billion on estimated fiscal 2021 revenue of $6.08 billion. The shares enjoy a rich price to earnings multiple of 36x, in line with big cloud companies like Microsoft (NASDAQ:MSFT). The 17-cent dividend yields just 0.46%.
This is a stock that younger investors, who grew up playing video games, buy for capital gains. Over the last five years EA has delivered annual gains of 29% and has outperformed the market during the pandemic.
The company’s cloud play is its EA Play subscription service. Microsoft offers EA Play on its Xbox cloud gaming service, Ultimate. EA Play drew 3 million new subscribers during the December quarter. It now has 18 million.
The subscription revenue, however, is still a small part of EA’s total. Sales of game software still dominate. Making the turn is crimping profits. For the December quarter EA earned just $211 million, 72 cents per share, on revenue of $1.67 billion. For the same quarter of 2019 it earned $346 million, $1.18 per share, on revenue of $1.59 billion.
The Multiplatform Approach
The Cloud Danger
By licensing its games through all platforms, including Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Stadia and Sony’s (NYSE:SNE) PlayStation Network, EA hopes to play the clouds off against one another as online play replaces consoles.
The danger is that as cloud gaming grows, from $500 million last year to $7.25 billion in 2027, cloud companies could gain in power at the expense of publishers. The biggest cloud provider, Amazon, (NASDAQ:AMZN), announced a cloud gaming service called Luna in September.
Publishers as well as stores are threatened by the cloud. ViacomCBS (NASDAQ:VIAC) got just $2 billion for its huge Simon & Schuster empire in November. TV and film entertainment are losing their place to cloud services like Amazon Prime, Google’s YouTube and Apple (NASDAQ:AAPL) TV. Music publishers are losing out to services like Amazon Music and Apple Music.
The Bottom Line for EA Stock
The best protection game publishers have against the cloud is the cost of game production. It can now cost much more to produce and maintain a high-quality game than any Hollywood movie.
But the threat is there. Publishers of books, music and entertainment thought they were protected against the clouds, too. Why do investors think gaming will be any different?
On the date of publication, Dana Blankenhorn directly owned shares in AMZN, MSFT and AAPL. He did not hold (either directly or indirectly) any other positions in the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at email@example.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.