Video Game Maker Electronic Arts Powers Up With Profit Potential

Electronic Arts (EA) is a global leader in video games - or in industry jargon, digital interactive entertainment.

The company possesses a cult-like following for its games, including Plants vs. Zombies, FIFA, Need for Speed, The Sims, and Medal of Honor. 

Its stock, which is up about 12% year to date, has performed well compared to peers such as Activision Blizzard. But there's still plenty of potential for more profits for investors who get in now. The company's 16.46% annual earnings growth potential for the next five years, coupled with hefty operating margins and strong return ratios, makes Electronic Arts a solid investment option. Shares dropped 3.35% in Thursday trading. 

Although game hardware sales have witnessed a downward trend, following a console refresh at Sony (PlayStation) and Microsoft (Xbox), video game sales have ticked up.

Electronic Arts' second quarter was mixed. Electronic Arts reported a $49 million operating income loss and missed its guidance for net revenue by about $17 million. But net revenue still gained about 10% and its diluted loss per share was smaller than expected. Also, a number of its sports titles, including Madden 17 and NHL 17, have strong followings. 

Electronic Arts generated momentum from its Battlefield 1 and Titanfall 2 titles, global competitive gaming tournaments, and FIFA soccer division and through the growth of mobile gaming. Moreover, the company has sharpened its mobile focus and already started looking ahead toward virtual reality (VR) experiences.

To be sure, there are concerns after the third-quarter forecast seemed light for the all-crucial holiday sales season. 

But if Titanfall 2 outperforms expectations, in the face of competition from EA's Battlefield 1 and the debut of Call of Duty: Infinite Warfare from Activision Blizzard, an earnings upside could occur.

Investors have preferred Electronic Arts over Activision this year, despite its lag in absolute earnings growth potential. EA has better margins and return ratios than some rivals, plus more cash on its books even after paying off debts.

With rising free cash flows, which grew more than fourfold in 10 years, the company is expected to maintain its excellent liquidity.

Once the virtual reality theme picks up, game makers such as Electronic Arts should benefit from the hunger for differentiated content among early VR users.

If you're looking to profit from the popularity of both console and mobile video games, Electronic Arts offers plenty of potential.

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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.

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