Electronic Arts New Coverage: $20.62 Trefis Price Estimate

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Electronic Arts ( ERTS ) is an international developer, marketer, publisher and distributor of games for video game consoles, personal computers, mobile phones and the Internet. Many of EA's most successful games are sports related under its EA Sports label such as FIFA, Madden NFL, NHL, NBA Live, Tiger Woods, etc. Other popular games are those based on popular movie licenses such as Harry Potter and games from long running franchises such as Need for Speed, Medal of Honor, The Sims etc. The company generates nearly 55% of its revenues from video game sales in the US and another 35-40% of its revenues from video game sales in Europe, and EA competes with other game developers like Activision Blizzard ( ATVI ), Take-Two Interactive Software ( TTWO ) and casual gaming mainstays such as Zynga etc.

We have a $20.62 price estimate for Electronics Arts , which is roughly in line with its current market price.

Launch of Coverage on Electronic Arts | $20.62  Price Estimate

We have broken down our analysis of Electronic Arts along the following divisions:

  1. Console & PC Video Games:
    (Subdivided into FIFA, Madden & NFS Console Franchise Games;  Third Party Video Games;  PC & All Other Console Video Games)
  2. Handheld & Mobile Phone Games
  3. Subscriptions

Digital centric business strategy

On account of the shift in trends for the video game industry from retail to digital, digital revenues have gained in importance for Electronic Arts. The trend is highlighted by the fact that a majority of the R&D being done is for developing massive multi-player online (MMOs), mobile games for smart phones and for the integration of digital distribution platform.

The results have also been promising for the firm so far. EA witnessed growth of 38%  in digital revenues from $524 million in 2009 to $721 million in 2010. Going forward we expect the digital revenues to increase in a similar manner.

Preference for in-house published games vs. third party games

In-house games refer to games developed and published by EA whereas third party games represent games distributed or jointly published by EA with other publishers. The company suffered losses in 2007 and suffered from declining profit margins. In a bid to improve the company's decreasing margins, EA decided to publish more in-house games compared to third party games. In general, developers have ~50-60% profit margin and distributors have ~20-30% profit margin in video games, and so we expect the shift to more in-house development to improve gross margins over time.

See our full analysis of Electronic Arts



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: ATVI , ERTS , TTWO

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