By Jack Denton
With the videogames industry in an intense battle to capture millions of players, one developer’s content is “materially undervalued” by investors, according to the managers of a $1.3 billion investment fund.
Mick Dillon and Bertie Thomson at Brown Advisory said that Electronic Arts /zigman2/quotes/206954087/composite EA -1.20% (EA) has a strong business model and an attractive stock price. FIFA 21, the latest installation of one of EA’s flagship games, will become available on PlayStation 4, Xbox One, Nintendo Switch, and Microsoft Windows on Friday.
The FIFA launch comes at a watershed moment for the videogames world. With Sony and Microsoft /zigman2/quotes/207732364/composite MSFT +0.48% sending their industry-dominant gaming consoles into a head-to-head fight for the fourth time, the sector faces a market changed by the coronavirus pandemic and a future, analysts say, likely to be defined by streaming and cloud-based games.
Dillon and Thomson co-manage the $1.3 billion Global Leaders Strategy fund, which invests in 30 to 40 companies.
EA, which has a market cap of $36 billion, specializes in sports games like its flagship FIFA and Madden series. It is estimated that more than 70% of the company’s free cash flow comes from its sports franchises and that, with FIFA, EA has more than 90% market dominance in soccer games.
Dillon and Thomson said this is crucial as videogame fans increasingly look to stream videogames.
“We view sports content as being unique and misunderstood by investors,” said Thomson. “In soccer, EA has the premium content — can you imagine, in effect, a global version of ESPN, Sky Sports and BT Sports in the videogame world?”
The frequency of franchise releases also “breeds annuity style consumption and high levels of engagement,” said Dillon.
EA live services, which includes in-game purchases, subscriptions, and esports, are a high-margin part of the company’s business and make up a growing proportion of revenue.
“In a world where many investors are struggling with richly valued technology companies, we view EA’s business model as having similar characteristics to vertical software — but available for a much more attractive valuation,” said Dillon.
But videogames can be a fickle industry. Pandemic lockdowns paired with the latest round of console wars have created an optimistic market dynamic, but, according to CMC Markets, the sector is highly cyclical, with game sales largely relying on hardware.
Branding can also have an outsize effect on share price: more than $750 million was wiped from EA’s market cap in 2019 after it lost its FIFA cover star Cristiano Ronaldo, when his soccer club signed an exclusive licensing deal with a gaming rival.
The coronavirus pandemic has played a crucial role in changing the market for videogames, as millions of housebound consumers began gaming for the first time or played more.
“During lockdowns caused by the pandemic, gaming soared in popularity again, as the multiplayer concept meant young people could still play and chat with their friends even though they couldn’t leave the house,” said Susannah Streeter, an analyst at Hargreaves Lansdown, in a recent note.
The pandemic has brought a boost to more casual games, like Fortnite, and EA’s offerings have been singled out by the chief executive of Fortnite’s developer as a key rival.
“The only game you can see where its peaks cut into Fortnite playtime is FIFA,” Epic Games Chief Executive Tim Sweeney told GamesBeat last year.
Others are broadly bullish on EA. Analysts at Wells Fargo, Jefferies, and Berenberg have all set a target price for the videogames developer at a premium of at least 25% to the company’s closing price on Tuesday.