EA Sports: Is It Still In The Game?

Dec. 2.11 | About: Electronic Arts (EA)

As much as I hate to admit it, I love video games. Growing up, I remember beating my brother for eight straight hours in games such as Street Fighter, Double Dragon and Tecmo Bowl. Then my cousin would come over and he would beat the daylights out of both of us. I downplayed it and suggested that not only did he constantly cheat, but he didn’t really have a life because all he did was play video games. Then I would ask him nicely to leave.

But when you are 14 what else is there? It’s about bragging rights and there was no better way to brag than after properly applying the key combinations for a blood-gushing kill after a victory in Mortal Kombat once the announcer says “finish him.” It makes for some good adrenalin flow.

Video games offer players the virtual reality of doing something in another world while sitting on their couch or (depending on your device) riding the subway. It allows me to release that constant “need for speed” without getting a ticket or even the idea that I can commit “grand theft auto” without going to prison. But as a sports fanatic, I can compile earth shattering hall of fame statistics while playing Madden Football and never having to punt on fourth down – regardless of distance. For many (including me) it’s a getaway and that need (in various forms) has been around long before I was born and likely will be around as long as man exists.

Game On Or Game Over?

One of the leaders in fulfilling that need is Electronic Arts (ERTS), the maker of one (if not the) of the most popular game franchises of all time – Madden Football. For the company, it has been a challenge to assess what the game giant has become. It is as iconic as Gatorade is to sports but over the years it appears the stock has gone through a transformation.

For a period of time, there was no doubt that it was one to consider for growth as its valuation once required growth in cash flow in the double digits. But it was through that growth that it was able to not only meet but also sustain. Suddenly things changed.

Video game consoles once dominated the game industry. For years, living rooms were dominated by Nintendo (OTCPK:NTDOY), Sega, Sony’s Playstation (NYSE:SNE) and recently the Xbox from Microsoft (NASDAQ:MSFT). But as players shifted to online and mobile gaming, it allowed other developers to not only establish a niche, but also secure significant profits and steal share from EA. In other words, the “virtual competition” has become real and EA is feeling the effects.

You can say that it started with Apple’s (NASDAQ:AAPL) first generation iPhone where free and $.99 cent games offered the same hours of enjoyment (see Angry Birds) as those that cost $49.99. Not to mention the advent and growing popularity of social gaming – namely Zynga, which plans to raise $925 million in an IPO. Its link to FaceBook could and should make it an instant success. So the question becomes, why spend $50 on CD games? This is where EA and other names such as THQ (THQI) and Activision (NASDAQ:ATVI) with its popular “Call of Duty” franchise struggle to create separation.

In its most recent earnings announcement, the company offered a slight revision in its guidance from the previous range of 70-90 cents earnings per share to 75-90 cents. It was hard to say whether or not it was an upward move, though I’m sure that is how it might appear to some. But it seems management has a firm grip on what it will take to restore the company to its once dominant position.

Summary

The company is in the midst of expanding its mobile and social gaming strategy by having recently acquiring KlickNation, a developer of social role-playing games. This comes five months after having acquired PopCap, a mobile games developer. Clearly it understands that the competitive landscape is heating up and it wants to stay in the game. Where the game console once ruled the industry, players now only need access to the Internet or their phones. It will take time to see what impact Google (NASDAQ:GOOG), Facebook, Apple and even newcomers like Renren (NYSE:RENN) will have on its performance.

Disclosure: I am long AAPL.