Wedgewood Partners - Electronic Arts Inc.

Jul. 31, 2019 6:57 AM ETElectronic Arts Inc. (EA)1 Comment
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Fund Letter Stock Ideas


  • We view the company's sports franchises to be unique and durable over a multi-year time frame.
  • We applaud the company's current strategy of using mobile as a revenue supplement.
  • We expect there remains a good opportunity for EA to improve the profitability of existing titles and launch new titles into untapped segments, at higher returns than we have seen historically.

The following segment was excerpted from this fund letter.

We recently initiated a position in Electronic Arts (NASDAQ:EA). The Company is one of the largest sports publishers in the video game industry. We estimate the Company generates close to half of its $5 billion in revenues - and well over half of the Company's profits - from sports-related franchises, such as FIFA and Madden. We view the Company's sports franchises to be unique and durable over a multi-year time frame, as well as to generate above-corporate average profitability and returns, facilitating reinvestment into attractive new segments of the nearly $100 billion video game industry.

For example, in February 2019 the Company launched Apex Legends, a "battle royale" genre, free to play title that we estimate is already on pace to generate nearly 5% to 10% of the Company's total fiscal 2020 bookings - and at a highly attractive +60% margin. Apex was developed in-house by EA's Respawn subsidiary, which is also responsible for developing the blockbuster series, Titanfall. While Apex is often compared to Fortnite and Player Unknown's Battle Grounds - both very successful, genre-defining gaming titles - we think the addressable market is substantial enough and growing quickly enough to support multiple offerings.

EA's core gaming franchises include Madden and FIFA, with FIFA generating the substantial majority of the roughly $2.5 billion in sports-related revenue. The Company has been licensing from FIFA the rights to develop the FIFA video game for various gaming platforms, for over 25 years, often launching a new title once a year. There are more than 15,000 professional soccer players in over 100 countries, playing across hundreds of club leagues and divisions, represented by FIFA around the globe. This sprawling, largely exclusive global licensing estate that EA has amassed over the past few decades makes it especially difficult for competitors to create a coherent, and globally

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