Video game producer Electronic Arts (EA 1.77%) makes some of the best-selling titles in the industry, particular its popular soccer title FIFA, which continues to deliver strong growth for the company. But not all of the company’s games are delivering the growth investors expect. Over the last five years, the stock has been stuck in a trading range, underperforming the S&P 500 index return of 56%.
But investors have to look at the longer-term trends in EA’s business and the broader gaming industry. Video game companies don’t usually deliver smooth growth year to year, since higher revenue often depends on the timing of game releases and other initiatives a company might be working on. That said, there are a few reasons I believe EA stock could outperform the market from here.
Key growth catalysts
EA’s strategy is to make it as easy as possible for people to play its games. The company wants to make games for all platforms, but the console market is EA’s largest revenue source, comprising 60% of the business.
Sony and Microsoft‘s latest generation of consoles, which launched in 2020, have sold at a brisk pace, but they have been regularly sold out due to supply constraints. EA has missed out on some revenue due to console shortages, but CEO Andrew Wilson noted on the earnings call that this headwind could change to EA’s benefit later this year.
What we’re hearing from our partners, particularly in console, is that a lot of the constraints around their ability to get product to market is pretty much behind us and that we should expect a fairly strong console supply in the coming quarter and the quarters through the rest of this year. So, that represents a great opportunity for us.
Meanwhile, EA significantly expanded its player base thanks to its omni-platform strategy. The company now has 650 million players across all its games and platforms. It reported over 600 million in the previous quarter, so EA is adding players at a good clip, and this provides more opportunities to sell content to a larger base.
FIFA likely contributed to this growth. The global interest in European football is a growing market for EA to reach more players with its best-selling FIFA franchise. EA said that bookings from the FIFA franchise grew 15% through the first three quarters of fiscal 2023 ending in March on a constant-currency basis. That puts the latest version, FIFA 23, on pace to be the biggest seller in the series’ history.
However, EA’s sluggish growth in bookings last quarter, where it reported a 5% year-over-year decline, means that smaller titles are not pulling their weight. To combat this, management wants to invest more in its biggest games, such as the annual sports releases, including Madden NFL. EA is also bringing back its college football title in the next few years, which should see strong demand.
While EA has been in a slump over the last year, it has substantial money-making opportunities with a growing player base. It is highly profitable and distributes a portion of its free cash flow in dividends. What’s more, investors can buy the stock at a cheaper price-to-earnings valuation than Activision Blizzard and Take-Two Interactive right now.
When you add together these factors — the easing supply constraints in the console market, the growth in EA’s player network, and profit-maximizing capital allocation, and a conservative valuation — you have a video game company that is well positioned to deliver good returns to shareholders.
John Ballard has positions in Take-Two Interactive Software. The Motley Fool has positions in and recommends Activision Blizzard, Microsoft, and Take-Two Interactive Software. The Motley Fool recommends Electronic Arts and recommends the following options: long January 2023 $115 calls on Take-Two Interactive Software. The Motley Fool has a disclosure policy.