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EA's Digital Gaming Cheers Growth - Analyst Blog

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Electronic Arts Inc. 's ( EA ) digital gaming segment seem to be going great guns as it registered 25 million active players worldwide for its Play4Free, EA's free-to-play digital gaming portal.

EA has a strong portfolio for its free-to-play games segment. Battlefield Heroes and Need for SpeedWorld are playing the perfect role of the flag bearer in this segment as they boast approximately 10 million registered players. Other popular titles such as the Battlefield Play4Free , Dragon Age Legends , Battleforge and Lord of Ultima contribute for almost 5 million active accounts out of the aforementioned 25 million gaming base.

To commemorate this achievement, EA has released a series of new cars for the Need for Speed title, while Battlefield enthusiasts will get their hands on new in-game clothing and weapons. To avail these cool in-game enhancements, players can redeem by the promo codes offered by EA. Moreover, EA has started beta testing its first browser-based MMO game, Command and Conquer Tiberium Alliances .

The Social and Digital Gaming Market

According to market research firm eMarketer, the U.S. social gaming market is expected to be worth $2.18 billion in 2012. Most of the social games are free to play and generate revenue primarily through the in-game sale of virtual goods.

eMarketer expects revenues from virtual goods to drive the biggest share of dollars through 2012. Advertising spending is expected to grow more quickly in 2012, and concurrently eMarketer forecasts an increase of 41% in advertising spending in 2012 compared with 2010. Moreover, market intelligence firm In-Stat estimates the worldwide market for virtual goods to double in 2014 from $7.3 billion in 2010.

Additionally, the shift of preference towards digitalized format of the game can be assessed by the rise in sales through digital media and spending on social and mobile games. Market research firm The NPD Group reported that there was a 7% rise in the sale through digital segment in 2011 compared with 2010. This partially offset the decline in new physical retail game sales in 2011, which dropped 6% from 2010 to $8.83 billion.

With consumer spending on mobile games and social networking games rising, we believe that publishing companies having an exposure in these segments would be able to gain a first mover advantage.

EA's Digital Metrics

EA has been strengthening its digital portfolio with in-house developments, as well as through acquisitions of social and mobile game developing companies such as PopCap Games and KlickNation.

In the recently concluded quarter, total revenue from the digital segment increased 30% from the comparable previous year. Downloadable and Free to play revenue surged 33% on a year-over-year basis on the back of revenue contribution from PopCap Games and the launch of The Sims Social game. Revenue from mobile and other handheld devices was up 8% on a comparable basis due to continued growth in smartphone-related revenue.

Moreover, the company expects to earn revenues of $1.15 billion to $1.2 billion in the fiscal 2012 from the digital segment. EA expects to leverage more games from its famous franchises like FIFA and Battlefield through the digital format to boost its digital offerings going forward. We believe that EA is in track to achieve its target on the back of its diversified offerings and strong fan-following going forward.

Recommendation

EA has a strong product pipeline for 2012 and has a significant exposure in the digital gaming market. In the upcoming quarters we expect social and mobile games to drive top-line growth.

However, in the social and digital gaming arena, the company faces competition from Zynga Inc. ( ZNGA ). Moreover, International Game Technology ( IGT ) is the latest entrant to the social gaming circuit following its acquisition of online social gaming company Double Down Interactive LLC.

Nonetheless, we believe that the company's high-quality titles, impressive product line, increasing online exposure, social games and portfolio diversification guarantee market share gains over the long term.

We therefore have a Neutral recommendation on Electronic Arts over the long term (for the next 3 to 6 months). For the short term (1-3 months), we also have a Hold rating on the stock, as indicated by the Zacks #3 Rank.

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


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

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