Why Electronic Arts Inc. Jumped 15% in 2016

By Travis Hoium Markets Fool.com

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Image source: Getty Images.

What happened

Shares of game maker Electronic Arts Inc. (NASDAQ: EA) jumped 14.6% in 2016, according to data provided by S&P Global Market Intelligence, as the game market in general recovered. After years of fretting over how mobile devices would change the console gaming industry, investors are finding that EA is going to have a bigger market to play in with both console and mobile markets.

So what

A strong earnings year was really what helped the stock, and digital sales were a real highlight. Over the trailing twelve months ended after fiscal Q2 2017, digital sales were up 12% to $2.6 billion, driven by 21% growth in console digital sales and 17% growth in mobile.

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EA Revenue (TTM) data by YCharts

Rather than being a negative for revenue and earnings, the expansion of internet gaming and content has helped EA find new avenues for growth. Digital downloads and other services have become a big business, and they're helping improve margins, which are expected to rise to 71% in fiscal 2017 from 63.4% in fiscal 2013. And the operational improvement is something investors were very happy about in 2016.

Now what

EA is in a great position in gaming today as a leader in both console and mobile games. And there will be further opportunities for management to monetize the business as the installed base of both consoles and mobile devices proliferates. I don't see growth in either segment stopping, and that should lead to further growth.

Shares are expensive at 22 times trailing earnings, but given the tailwinds in the game industry I think the stock still has room to have a great year in 2017.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.