For This Video-Game Maker, a COVID-19 Boost Is Just the Beginning
Video-game spending smashed records in the first quarter...
With people around the world under stay-at-home orders because of the COVID-19 crisis, they've needed some way to keep themselves entertained. And according to market research firm NPD, video games were not only being used as entertainment, but also as a "means of staying connected with family and friends."
NPD said video-game spending – including spending on consoles, games, and software – reached a record $10.86 billion in the first quarter. That's up 9% from the same quarter last year.
But while the industry got a short-term boost from the pandemic, it also has long-term tailwinds. The global video-game market is forecast to double to $300 billion by 2025, according to data analytics firm GlobalData.
That's good news for today's company...
Electronic Arts (Nasdaq: EA) is a $34 billion titan of the video-game industry. It's one of the top video-game publishers in the world.
EA boasts a popular set of sports games, as well as popular titles like Star Wars Jedi: Fallen Order and Apex Legends.
And it just locked up the rights to one of its biggest games for five more years...
The video-game maker renewed its deal with the NFL to make its Madden football game through 2026, according to digital media company the Action Network. The deal will see EA pay an estimated $2 billion to the NFL for the rights, according to the report.
Madden is a key part of EA's core sports games portfolio. Madden and EA's FIFA soccer game are the only two EA games to sell more than 100 million copies. EA's sports portfolio also includes NHL hockey games.
EA comes out with a new version of these games every year, and its loyal customer base keeps coming back for more. Each new version of EA's FIFA game is at or near the top of the list of that year's best-sellers. These games have steady demand year after year, producing loads of free cash flow for EA.
But EA's game portfolio isn't its only strong tailwind...
The company is becoming increasingly focused on selling games digitally.
Game discs and cartridges are becoming obsolete. Customers no longer have to drive to the store to buy games... or have them shipped. They can do it all at home, directly over the Internet.
Customers can buy EA video games in many places, including the digital storefronts of Sony, Microsoft, and Nintendo. EA also has its own digital storefront, called Origin, for Mac and PC games. Origin's premier digital subscription costs $15 per month or $100 per year. Subscribers get access to 220 games as well as early access to upcoming releases.
And it just entered a partnership with Alphabet (GOOGL) to bring its games to Stadia, Google's cloud-gaming service.
Right now, 78% of EA's sales come from digital downloads. That's up from around 20% in 2011. By cutting out the middleman – in this case, retailers like GameStop (GME) – EA can expand its already thick margins.
The physical-to-digital shift in the video-game industry is well underway. And EA is well-prepared for this shift.
In addition, EA recently received a boost from coronavirus-quarantined gamers, with both earnings and revenue beating fourth-quarter estimates. And the company said it is seeing "heightened levels of engagement" and strong live-services bookings because of the pandemic.
Since bottoming in December 2018, EA shares have rallied more than 50%. And they fared better than the overall market during the sell-off in March... EA shares fell a maximum of 23% from their 2020 high, versus the 34% decline for the S&P 500. And EA shares have already rallied to new 2020 highs, while the S&P 500 remains about 5% below its highs for the year.
EA is perfectly positioned to take advantage of both short- and long-term tailwinds for the video-game industry. It has a world-class portfolio of games, and is shifting to digital sales. This should support a move higher in the stock price.
Sometimes investing is simple.