After posting excellent figures in its fourth fiscal quarter, gaming giant Electronic Arts (NASDAQ:EA) was eagerly looking forward to the 2014 Electronic Entertainment Expo (E3), which took place in Los Angeles June 10-12. The company outperformed market expectations in its previous quarter due to strong performances from next generation consoles. The industry shift to the digital domain gave an incremental boost to top line growth, as the company was able to beat its revenue guidance by 15%, primarily due to strong demand in digital offerings. E3 gave an added platform for EA to showcase its upcoming title releases and other partnerships planned that will help define its space in the industry. EA took a different approach to the E3 convention this year, where in addition to the usual round of trailers, it provided more behind-the-scenes looks at games with a thoughtful outlook from other developers. The annual video game convention was more significant this time since it was the first E3 after the twin release of next-generation consoles - the Microsoft Xbox One and Sony PlayStation 4.
Electronic Arts, being one of the biggest players in this industry, was a major attraction at this exhibition. The Ultimate Team services for sports-based titles such as Madden and FIFA have gained much popularity in the digital domain. EA releases the annual version of these two sports titles in the second half of the calender year, which are well received by gamers. Madden NFL'15 is scheduled to be released in last week of August, whereas FIFA'15 is set to hit the market in September. Both these games will be available on all major gaming platforms.
Our $27 price estimate for Electronic Arts' stock implies a premium of 20% to the current market price. EA's stock has gained more than 50% since the turn of the year, with a 15% increase after the release of its annual report in March.
FIFA Franchise To Outperform
EA is already a leading force in sports games with its profitable franchises such as Madden NFL and FIFA outperforming some of the best competing franchises over the past few years. Both titles accounted for more than 68% of the total sports game sales worldwide on all major gaming platforms. New versions of these two titles were exhibited in the expo. The company expects FIFA'15 to be a money minting title this year and forecasts a significant jump in sales for the franchise, as excitement is high due to the FIFA World Cup. The mega-event is ongoing in Brazil this year, with over 500,000 fans from all over the world expected to be in attendance. Sales of the annual FIFA franchise went up 25% after the last world cup in 2010. (VGChartz, 2010 Global Yearly Chart)
Moreover, some technical improvements have been made to the newer version, to graphics and other in-game details, making it much more lucrative for gamers. We have already taken into account the increase in sales of FIFA'15 from the event hype and with some additional gains from the DLC stream.
FPS Genre Targeted: Hopes On Titanfall and Battlefield
In its E3 preview conference, Electronic Arts threw light on its early designs, concept visuals and prototypes of titles which are scheduled to be released in the coming couple of quarters. The company unveiled most of the games which were being anticipated before the event. The highlight of the show were action role playing and first person/third person shooter (FPS) games like Star Wars: Battlefront, Dragon Age: Inquisition, Mass Effect 4 and the much awaited Battlefield Hardline.
Gamers are drifting more toward shooter games, evidenced by the fact that shooter games accounted for 14% of total game sales in 2013. EA is trying to strengthen its hold on the FPS segment through its Titanfall and Battlefield titles, directly in competition to Activision Blizzard's (NASDAQ:ATVI) Call Of Duty franchise, the leader in this genre with nearly 50% of the total shooter game sales worldwide. On the other hand, Battlefield accounted for one-fifth of the total FPS games sold worldwide last year. According to an April NPD report, Titanfall led this segment for the second month in a row, ahead of Call Of Duty, in the month of April. EA launched the beta version of Battlefield Hardline on the June 9, but the full game will be available on all major platforms on October 31. Full game downloads for Battlefield's previous version and Titanfall led to a 13% increase in the digital stream for the company, accounting for 20% of fiscal Q4 digital revenues. However, Activision is also releasing its new Call of Duty franchise later this year.
Over the past few years, Electronic Arts has been focusing less on the number of titles to be released and more on their "hit rate," the number of titles in the top 100 selling games relative to their annual titles released. In 2013, the hit rate rose to 71%, up from a mere 21% in 2010. We expect the company to maintain a hit rate around 75% over the decade.
Other games to feature in the event include Mirror's Edge 2 and sports titles such as NHL'15 and UFC. These are some of the popular titles contributing significantly to the company's software sales. EA's plan to stress on cost controls and in-game quality should render a firm base for software sales in 2015 and to some extent in 2016.
Disclosure: No positions.