Electronic Arts' (EA) stock went on a rollercoaster ride last week as the video game publisher admitted that there were issues with it's first person shooter (FPS) Battlefield 4.  The company announced that the development team at DICE, its Swedish game developer, would halt work on other projects like Mirror's Edge and Star Wars: Battlefront to focus on fixing the problems faced by Battlefield 4 players.  EA's stock fell 8% after it made the announcement but has bounced back this week.
Microsoft (MSFT) and Sony (SNE) have just launched their eighth generation consoles, eight years after the last generation was released. The console transition period was the perfect opportunity for EA to make inroads into the FPS market. First person shooters like Call of Duty, Halo 4, Battlefield 3 and Far Cry 3 accounted for 20% of total video game sales last year.  Battlefield 3 accounted for just 8% of these sales while Activision Blizzard's (ATVI) Call of Duty: Black Ops 2 accounted for more than half of the sales.
Despite the missed opportunity, Electronic Arts' dominance in the sports games domain should hold it in good stead through the ongoing console transition. Our $28 price estimate for Electronic Arts' stock implies a premium of 20% to the current market price.
Dominance In Sports
Battlefield 4 is one of five games that EA currently offers for next-generation consoles.  The others include FIFA 14, Madden NFL 25, NBA LIVE 14 and Need for Speed Rivals. The lineup highlights Electronic Arts' main strength: sports. EA has exclusive licensing agreements with NFL and FIFA, which allows it to maintain a near monopoly in the sports games domain.
FIFA accounted for 7% of global game sales on the Xbox platform last year while Madden accounted for 3%. In the U.S., Madden accounted for 4% of total sales while FIFA accounted for 2%. FIFA is EA's strongest offering, accounting for nearly half of the company's sales last year. Madden accounted for 15% of EA's unit sales in 2012.
The FIFA World Cup is scheduled to take place in Brazil next year. PWC expects 500,000 soccer fans to attend the event with millions across the world watching the tournament on television.  The fanfare generated by the massive global event will help EA's flagship soccer-based game, FIFA. With an exclusive licensing agreement with the sport's governing body and a distinct lack of competition, we expect strong sales for FIFA in 2014.
Repeated Errors Prevent EA From Expanding
Battlefield is not Electronic Arts' first blunder. Earlier this year, EA was voted as Consumerist's Worst Company in America.  Passionate gamers have expressed concerns about Star Wars: The Old Republic and SimCity. Electronic Arts' strategy of selling downloadable content (DLC) through in-game micro-transactions was also one of the reasons the company received 78% of the votes in the poll.
Such errors keep Electronic Arts from realizing its maximum potential. According to our analysis, capturing a 25% market share in the FPS market would have led to a 15% increase in revenues for EA with a potential 10% upside to our price estimate.
Our current forecast for EA takes into account the dominance of Activision's Call of Duty franchise. Call of Duty: Black Ops 2 was the best selling game of 2012 in the U.S.  The game accounted for more than 11% of total video game sales worldwide, with a market share of 20% on the Xbox and Playstation platforms. Annual editions of the franchise have made the top ten best selling games across the globe for the last five years.  Even before EA announced the issues with Battlefield, we believed that Call of Duty would continue to dominate the FPS market. The hindrance with the problematic Battlefield launch serves to confirm our view.
Disclosure: No positions.