Electronic Arts (EA) has been on a tear recently after its "Battlefield 3" launch received significant praise. The game has gotten stellar reviews due to its great multiplayer battles and next generation graphics.
EA is a much better company than its competitor Activision Blizzard (ATVI) for several reasons. Unlike Activision, EA appeals to a much broader base of gamers. EA Sports has some very strong brands such as Madden and FIFA, which are cash cows. Then they have shooters such as the Battlefield and Crysis franchise.
The reason that EA is a much better company compared to Activision is because no single game accounts for a large chunk of revenue. While Activision does have strong brands like "Call of Duty," it's important to note that "World of Warcraft" accounts for 35% of revenue. "World of Warcraft" subscriptions have been falling substantially and Activision is hoping "Modern Warfare 3" will boost the company's earnings again.
This is why EA comes out ahead. Every year, there is a new refresh cycle for FIFA and Madden, which means EA does not necessarily have to come out with a brand new game, rather they just need to continuously improve their previous versions. Just like Microsoft introduces new versions of Office, EA does the same.
While EA is not as profitable as Activision, the future looks brighter for EA. EA's "Star Wars: The Old Republic" seeks to compete with Activision's World of Warcraft. While WOW has a much larger base, its subscriptions are falling, while SWTOR has seen explosive growth and seems to be taking away market share from WOW. The game officially launched on December 20th and already has over a million paying members. A survey done by Peanut Labs states that 50% of WOW subscribers plan to purchase SWTOR. In just one week, SWTOR has already 10% of the members that WOW has.
While EA trades at a forward P/E of 17 compared to Activision's forward P/E of 12.8, the market is saying that EA has higher growth ahead. I believe this to be true and while EA has a market cap half that of Activision, that will narrow as WOW loses and subscribers and SWTOR gains subscribers. Activision is a sell because of its dependence on the WOW brand, but the brand seems to be falling out of favor with most players. Activision will need to find a way to balance out the loss of revenue on its largest brand. While Activision still has "Call of Duty," it needs to build up another brand that can fill the hole that WOW is starting to leave. EA is a great buy as it has so much more potential ahead as well as many strong brands.