- Electronic Arts has pulled back slightly after latest results due to launch delays of a couple of key games.
- EA, however, has a strong gaming pipeline, and it is already delivering impressive growth that can be sustained going forward.
- EA's strategy of keeping gamers engaged with new expansion packs and cult games should lead to stronger growth.
- EA is cheap on a forward P/E basis, and its bottom line is expected to grow at a fast clip, making it a stock to buy on the dip.
Electronic Arts' (NASDAQ:EA) dream run in 2014 came to a halt when the company released its first-quarter results. So far this year, the stock has gained around 60%, but it has been going down since July 22, the days the report was released.
A short-term hiccup
Despite reporting strong growth, EA has been crashing on account of the delayed launch of Battlefield Hardline, one of its marquee game supposed to be released during the holiday period. As a result, EA looks set to lose steam in the second half of the year. The upcoming Battlefield franchise wasn't the only game to be delayed. It has also postponed Dragon Age Inquisition by more than a month.
However, investors need to look beyond the short-term. EA has a strong pipeline of new games under its belt, which will help fuel its growth going forward. The company is already growing at a rapid pace, reporting a 28% year-over-year increase in revenue in the previous quarter. It also reported a net profit of $61 million compared to a year ago loss of $121 million. Along with this it's operating cash flows also improved and came at $252 million.
Making the right moves
Now, EA has decided that Battlefield needs additional work, which will probably make the game stronger as the company spends more time on developing it. At the same time, since EA already has a strong portfolio of games, investors should look at the long-term prospects. In fact, EA's growth was driven by the success of strong sales of its titles such as Titanfall, Ultimate Fighting Championship, and FIFA. The company's digital revenue also increased, and cost control measures helped it improve the bottom line rapidly.
Looking ahead, management is confident that new launches in the coming months will lead to further improvements. EA is already leveraging the popularity of its franchises. More than 53 million matches were played in FIFA Ultimate Team World Cup mode, which is equivalent to more than 830,000 World Cup tournaments in the previous quarter.
Now, EA is preparing to launch FIFA 15 to sustain the momentum of this franchise. Similarly, Ultimate Fighting Championship is also doing well, exceeding EA's own expectations with more than 65 million fights played since the game launched.
A strong pipeline
The company is intent on improving its numbers further with many new exciting games to be launched in the coming months. In a statement to the press, management said, "We have some amazing new experiences coming this year - games that will connect, inspire, challenge and entertain players."
The company is counting on its yet to be launched Dragon Age: Inquisition, which, according to management, is the biggest role playing game that BioWare has ever created in its history. The game is equipped with cutting-edge graphics, characters that look real, and a rich story line. The game was already a big hit with fans and critics at E3 and bagged 25 awards, including the best RPG from the E3 Game Critics.
On the other hand, while Battlefield Hardline has been delayed, there can be no doubting its popularity. EA delayed its launch citing additional work to be done, and as a result, it missed out the sales opportunity during the holiday season. Although some analysts are skeptic about this delay, but management is confident that this is the right thing, since EA will now have more time to innovate the game further.
Moreover, EA is following a smart strategy by releasing expansion packs to keep gamers engaged with the Battlefield franchise. It is planning to launch new Battlefield 4 content in the form of Dragon's Teeth and Final Stand. Additionally, EA is improving the Battlefield experience. It is pushing out new updates and features for Battlefield 4 players. Recently, EA piloted a Community Test Environment for players in order to gain feedback on what they need from the game. This will undoubtedly improve the quality and popularity of the franchise as EA is taking gamers into confidence with such a move.
In addition, EA is scheduled to launch The Sims 4 in early September. The game includes major technical innovations with new Sims emotions and unique personalities, which will lead to strong engagement among both veterans and beginners. Going forward, EA will further improve its mobile gaming experience with the launch of its biggest brands such as FIFA, NFL and many others on mobile. All these new titles will be launched for iOS and Android players in the coming months.
All in all, investors shouldn't be fazed by a delay in the launch of Battlefield Hardline. EA's existing portfolio is doing commendably, and there are a number of games lined up for release going forward. Finally, at a forward P/E of 16, EA looks like a good buy on the pullback, as its bottom line is estimated to grow at a CAGR of 24% for the next five years.