Is This Electronic Arts's Biggest Weakness?

A boy wearing headphones sitting in a chair and using a smartphone.

Electronic Arts 's (NASDAQ: EA) fiscal first-quarter earnings showed that its top franchises like FIFA 18 continue to perform well, but there's one subtle negative that seemed to go unnoticed -- slowing mobile revenue growth.

The video game maker's mobile game revenue actually declined 2% year over year in the recent quarter. It becomes alarming when you consider the mobile market is currently growing about 27% annually and is expected to make up the majority of video game sales in 2018 for the first time ever.Given that mobile games are quickly becoming an important growth driver for the industry, this is not the best time to be falling behind in mobile.

EA's mobile business is not what it used to be

EA's 2% decline in mobile revenue is puzzling given that EA was one of the first major game companies to recognize the growth opportunity in mobile several years ago. They were quick to assemble a very diversified collection of mobile games to capitalize on the trend.

Among EA's crown jewels is Plants vs. Zombies maker PopCap Games, which EA acquired in 2011 for $750 million.In 2010, EA acquired Chillingo, which owned the UK publishing rights of the massively popular Angry Birds franchise.

Under its own mobile development arm, EA has ported over mobile versions of its popular sports franchises over the years with much success.From fiscal 2011 through fiscal 2015, EA's mobile revenue soared at an average annual rate of 21%. But it's dramatically slowed over the last three years, growing only 8% per year. It currently makes up about 17% of the company's total revenue.

EA is even underperforming its rival, Activision Blizzard (NASDAQ: ATVI) , whose King segment grew mobile revenue 13% in the first quarter and 5% in the second quarter to start 2018.

What's the deal with EA's mobile games?

During the first-quarter conference call, CFO Blake Jorgensen explained EA's 2% mobile revenue slide was due to "slight declines in older titles."This reflects an aging mobile portfolio that is not keeping up with the types of games that are attracting mobile gamers today.

When EA was laying the foundation for its mobile game business years ago, mobile games mainly catered to the casual player. So, it's not surprising that EA's strengths lie in sports and casual mobile titles. There's still plenty of demand for casual games, as Activision's Candy Crush franchise shows. However, with desktop-class processing power being featured in the latest mobile devices, mobile gamers can now enjoy graphically demanding games like first-person shooters for the first time.

Recent moves may not be enough

EA recently made some moves to enhance its mobile business. It just acquired mobile game maker Industrial Toys ( Midnight Star ). Additionally, EA has partnered with Tencent Holdings 's WeChat social media platform to distribute FIFA Mobile in China.

CFO Blake Jorgensen said, "It's still early days, but the game delivered one of the highest-grossing days ever for any of our mobile titles and hit No. 1 in the iOS download charts."

While that's good news, the future of EA's casual-game-focused mobile business still looks shaky. The top-grossing games in China are heavily weighted toward multiplayer shooters and battle-arena games, such as Honor of Kings ( Arena of Valor ), PUBG: Mobile , and Cross Fire .Even in the U.S., the same trend is starting to take shape, as evidenced by the success of Fortnite on mobile.

EA has much more potential

EA has its Battlefield shooter, but there's currently no mobile version available. With Activision partnering with Tencent to release a new mobile version of Call of Duty in China, EA may need to get with the program and release its own mobile shooter.

Mobile certainly looks like EA's biggest weakness right now, but it doesn't have to be. After all, Activision wasn't on the mobile scene much at all until its 2016 acquisition of King Digital Entertainment ( Candy Crush ) for a whopping $5.9 billion.

It may take a similar move by EA to jump-start its mobile revenue once again. EA has less than a 1% share of a $70 billion mobile game market that is growing about 27% annually. Given its $1.6 billion in trailing 12-month operating cash flow and $4.97 billion of cash on the balance sheet, EA certainly has the resources to make some big moves.

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John Ballard owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard and Tencent Holdings. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy .

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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