Electronic Arts Shares Surge As the Video-Game Giant Continues to Dominate PlayStation 4, Xbox One

By Markets Fool.com

Since their debuts in late 2013, Electronic Arts has consistently been the top publisher on both the PlayStation 4 and the Xbox One.

Continue Reading Below

That advantage benefitedElectronic Arts' shareholders on Tuesday. The video-game giant surged in after-hours trading, rising more than 4%, following afiscal fourth-quarter earnings report that far exceeded both analyst estimates and its own guidance.

Electronic Arts earned an adjusted $0.39 per share on revenue of $896 million. Management had previously projected earnings of $0.22 per share on revenue of $830 million; Wall Street analysts were looking for about $0.25 per share on revenue of around $850 million.

Let's take a closer look at Electronic Arts' results.

Mobile, digital, and next-generation consoles
Three trends stuck out in Electronic Arts' earnings report: the ramping up of its mobile business, an increasing shift to digital distribution, and the rising importance of the next-generation consoles to its continued success.

Mobile games -- those played on smartphones and tablets -- brought in $150 million of Electronic Arts' adjusted net revenue during the quarter, up about 22% on an annual basis. In its fiscal fourth quarter of 2014, mobile games brought in about 13.4% of Electronic Arts' adjusted revenue -- and that figure rose to 16.6% this quarter. Electronic Arts has many different mobile games, including its popular sports franchises, but it drew particular attention to The Simpsons: Tapped Out, which averaged just over 16 million monthly players during fiscal 2015. In total, Electronic Arts' mobile monthly active users averaged more than 165 million in the fourth quarter, up from 130 million in fiscal year 2014.

Continue Reading Below

Mobile games are inherently digital -- gamers download them over the Internet to their smartphone or tablet; no physical media is ever involved. This situation stands in contrast to Electronic Arts' traditional business, which still sees the bulk of games sold on physical discs. Electronic Arts' management, however, has been explicit in its desire to derive the overwhelming majority of its future revenue from digital sources. In the fourth quarter, it continued to make good on that effort.

Just over 67% of Electronic Arts' fourth-quarter adjusted net revenue came from digital sales, up from about 60% in the same quarter last year. For the full fiscal year, digital sales brought in just over 51% of its adjusted net revenue. Full game downloads -- retail games downloaded directly to gamers' PCs and consoles -- brought in about one-fifth of Electronic Arts' total adjusted net revenue.

This is a good trend for Electronic Arts' shareholders, as digital sales generally carry higher margins, and full game downloads can't be resold second-hand.

The Xbox One and PlayStation 4 include built-in marketplaces to help facilitate digital game sales. Despite their age (they've been around since November 2013), both consoles are still considered to be "next-generation," in contrast to the older Xbox 360 and PlayStation 3. Sales of its games on next-gen consoles rose 23% on an annual basis, while sales of its games on the Xbox 360 and PlayStation 3 fell 33%.

A new share repurchase program
In its earnings release, Electronic Arts announced a new $1 billion share repurchase program, which will run through the end of May, 2017. Electronic Arts' is not compelled to purchase all $1 billion worth of stock, but if it did, it would represent about 5% of its current market cap. Electronic Arts can afford it -- it had just over $2 billion of cash on its balance sheet at the end of the quarter, up from about $1.8 billion last year.

But EA's outlook was mixed
If there was anything negative in Electronic Arts' earnings report, it was its outlook.In fiscal year 2016, Electronic Arts expects to earn an adjusted $2.75 per share on revenue of around $4.4 billion. That earnings guidance is better than consensus analyst estimate of $2.64, but the revenue projection is short of the $4.48 billion Wall Street had been modeling. It's worth noting, however, that Electronic Arts has been consistently beating its guidance for the past several quarters -- its outlook may be overly conservative.

Electronic Arts has been one of the best tech stocks to own over the past 12 months -- even ignoring Tuesday's after-hours rally, Electronic Arts' shares are still up better than 107% since last May, and more than 25% year to date.

That rise may appear overly excessive, but with the publisher firing on all cylinders, it's justified. Electronic Arts is executing and continuing to dominate its industry.

The article Electronic Arts Shares Surge As the Video-Game Giant Continues to Dominate PlayStation 4, Xbox One originally appeared on Fool.com.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.