Electronic Arts Is Not A Company For Long-Term Investors To Ignore

By Motley Fool StaffMarketsFool.com

In both 2017 and the last 12 months, the gaming industry has seen massive growth, and its investors have been well rewarded.

In this clip from Industry Focus: Tech, Motley Fool analysts Dylan Lewis and David Kretzmann dive into one of the biggest companies in the space with huge growth in the last few years, Electronic Arts(NASDAQ: EA). Listen in to find out how EA makes the majority of its revenue and why it's so promising for the company's future, what strategies EA is taking to diversify its offerings, how it is tapping into consumer appetite for franchise material, and more.

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A full transcript follows the video.

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This video was recorded on May 26, 2017.

Dylan Lewis:Lookingover at one of the other big players in the gaming market,Electronic Arts issomething that sports fans probably know very well, arevery familiar with. They makesome of the most popular sports games out there,includingFIFAandMadden. They havetons of other franchises. LikeActivision, EA isreally enjoying the fruits of that transition to digital. Yousee it in their margins.

David Kretzmann:Oh,yeah, absolutely. Their total sales in thismost recent quarter was up 17%. Their digital sales up over 30%. And now theirdigital sales are over 60% of revenue. You're seeing their marginsover the past few years, it's so clear, andit's a nice trendto see those margins on the top and bottom line, trending up. Andthe biggest contributor to the digital sales iswhat they call "Ultimate Team." This is within theirsports franchises, whether it'sMadden,NFL,FIFA,NHL,NBA Live. AndUltimate Team is kind of the combination offantasy sports games like fantasy football or fantasy basketball andcollecting trading cards. So,you're essentially building a team, andyou get these different packs withplayers and other things. Over time,you're building a team, you'reable to trade players, and ittakes into account all sorts of things. If you're building a team, aFIFAUltimate Team, ittakes into account thedemographic of the player. So,will a Brazilian soccer playerget along with an Italian player? Ittakes into accountall these differentchemistry items. Last year,management said there were 2 milliontrades happening inFIFAUltimate Teamevery second. So,the level of engagement of peoplewhostep into Ultimate Team is staggering.

Lewis:Andthe idea there,to clarify for listeners, is,I have an Ultimate Team, you have an Ultimate Team, andwe have players who are looking to optimize the rosters, ormaybe you have a player that I'm a particularly huge fan of and want.

Kretzmann:Right,exactly.You can trade and try to upgrade your team over time, and then you can buy the virtual currency, andmaybe acquirecertain players or certain packs or something. And you'recompeting against other players. Inthe sense of fantasy footballwhere you draft your team and you're followingthose players, you'retrying to fine-tune your team andyou're competing against other people, this takesfantasy to a live-action level, where you'reactually able to physically play the game, you'reable to manage your team over time, andthat's something that's really resonated with the players of these games. So that nowmakes up about 30% of their total digital revenue, that Ultimate Team segment. So,I really like how they're focused on thatcompetitive gaming aspect, e-sports, isactually something that comes up a lot.Activision wants to become the ESPN of e-sports, and really focus on that elite level ofplayers who are literally getting paidto play video games, and people will watch people play video games.Electronic Arts is more focused onindividual players competing with one another,and I think they've done a really nice job ofcreating a really compelling, live,constantly updating experience whereyou're competing with tens ofmillions of people around the world,whether it's inFIFAorMadden. Andso far, that's been a huge driver of their digital success.

Lewis:Andyou look at that, and you're like, well,this is something that they just could not have done beforethe internet enabled gaming to really take off. Back inthe model of 15 years ago, wherepeople were buying discs andthey weren't on consoles that were connected,you were playing with your friends in your house. Andit was nice because people had to buy the discs, butthey didn't have all of these additional purchases thatpeople could be making. The microtransactions, it seems, arebecoming a growing and growing segment for a lot of thesevideo game producers.

Kretzmann:Yeah. In the case of Ultimate Team,I think it launched in 2009, andinitially it was an add-on feature thatyou needed to pay more for. So,you would buy the disc,and then you could buy access to this feature. Butnow with something that comes free initially, soanyone can join. But once you're in, you tend to be locked in, and you stick with it. And thenI think a good amount of people end up spending money there. So,obviously, with Electronic Arts, that sportsarea is where they dominate.I also really like what they're doing to expandinto the action and shooter genre, which arethe biggest genreswithin the video game space.They haveBattlefield 1, whichwas a huge hit last year, andthat's performing better thanthe sequel toBattlefield 1,which is calledBattlefield 4,which is a little confusing, I'm not sure how they came up with the names there. But,essentially, they're seeing higher engagement withBattlefield 1thanthey were seeing with its predecessor over a comparable period. So,that's always nice to see.

They also have,essentially, a decadelicensing agreement withDisneytopump outStar Warsgames. Coming up this year you haveBattlefront 2, whichlooks like a very compellinggame. The firstBattlefrontreboot thatElectronic Arts did a couple years ago, it gotkind of timid reception from fans,but it looks like they've incorporated a lot of the feedback, andpeople are really excited about that game, soI think that will be a big hit for them. And,obviously, as you have moreStar Warsmoviescoming out over the next few years, I thinkthat puts them in a golden position. That also goes to mobile. There'stheStar Wars: Galaxy of Heroesmobile game, which is sort of asimilar concept toUltimate Team, whereyou're able to trade thedifferent characters and collect the characters,kind of a collectingfantasy game. Theaverage user spends 162 minutes a day playing that game, and that number has steadily ticked upover the last year. I mean,that's about two and a half hours a dayfor the average user on that game.I don't know what that means for productivity in the world.

Lewis:I would love to see that metric for Fools.[laughs]

Kretzmann:I know. We couldcount it as research, though,so we have that perk. But, just,the level of engagement thatthey've been able to create just shows that they'reproducing some incredibly compelling content. Bycomparison, I thinkthe average power user ofCandy Crushis spending more like 35 minutes a day. In the case of thisStar Warsmobile game, be careful whenyou download that, because you might lose a lot of time out of your day.

David Kretzmann owns shares of Activision Blizzard, Electronic Arts, and Walt Disney. Dylan Lewis owns shares of Walt Disney. The Motley Fool owns shares of and recommends Activision Blizzard and Walt Disney. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.