Electronic Arts - Why has it's financial performance been so poor?

Electronic Arts - Why has it's financial performance been so poor? Talkin' about SWTOR and WOW and Ford Motor Company - and all that good stuff.

Electronic Arts - Why has it's financial performance been so poor?

So in my previous blogs I wrote about how I think EA will recover in the next few years and will return to profitability.

In this blog post I want to talk about why I think EA has been performing poorly in the past and whether or not I intend to maintain my stock investment in Electronics Arts common stock.

Full disclosure: I own a good amount of ERTS (Electronic Arts) stock and I have seen a steady decline in the value of it since I purchased it in Nov. 2011. Nothing to break the bank, but it's part of my 40 stock portfolio.

Electronic Arts has had some poor financial performance since the start of the "great recession" just like almost all other game companies except for Activision-Blizzard. It has not had a positive net income since 2007 and even that was barely break-even. So you don't need to be a financial expert to come to the conclusion that EA has been having serious financial trouble the last few years.

2011 2010 2009 2008

-$276,000,000 -$677,000,000 -$1,088,000,000 -$454,000,000

Some analysts attribute this to the rise of mobile games. They say that people who were once buying Mass Effect and Battlefield 3 and the Sims 3 are now playing Farmville and Frontierville and Angry Birds and Words with Friends. I feel that this is likely the view of an outsider - someone who does not truly understand the games industry or culture. Otherwise I feel that this is an excuse used by large game companies for the unprofitability of their big name games. I am not going to back this view up with science as we know how useless it is in convincing your average American with science - but I think at least half of you feel the inherent BS in the "blame mobile games" movement.

Any gamer worth their weight in Star Wars memorabilia and collectible card decks knows that you do not satisfy your gaming hunger with Farmville.

And don't get me wrong, I am not an advocate for modern high budget game design. I frankly find most videogames pretty mediocre nowadays but I do not and will not ever believe that people are satisfying their gaming needs on their iPhone. That to me is utterly ridiculous.

Their will always be a place for graphics and high speed internet connections and a comfortable couch and a nice big TV. I frankly can't play a game on my iPhone for more than 15 minutes without the beginnings of severe arthritic neck convulsions.

So why the horrible financial performance of these big name games companies? Why are they all( with the exception of Activision Blizzard) performing so horribly?

I have two theories:

One is that they just spend way too much money on the development of these games. The games industry is not like the wheat procurement or the telecommunications industries. The people who invest in the games industry don't always invest in it to just make money. They often invest in it because they want to be a part of it. They will ignore runaway costs and grossly overdeveloped games because they have a love for the product. So no matter how much money these games bring in, their budgets are going to be so high that they can't turn a profit.

The second theory I have (which is actually closely related the first) is that the games industry is actually one of the most competitive industries of any artistic industry. These companies are destroying each other, they are underpricing and competing and trying to drive their competitors into the ground so they can one day stand atop the mountain of game industria and proclaim "behold! I have slain my foes, now you shall play only my games" The reason that the game industry is so competitive is because everyone wants to be a part of it.

"Now" you might ask, "why would you ever buy stock in one of these companies"?

And this is a valid and legitimate question. The answer: Stock prices are all about expectations. Ford stock went down from 32 dollars in 2001 to a low of about 1 dollar in 2009. Everyone was worried that it was going to collapse just like GM was about to do and Chrysler was about to do. Ford did one thing differently from GM and Chrysler though. Ford moved away just a little bit more quickly from the SUV's and large trucks that had plagued our society and traffic jams during the W. Bush era. They had an extremely successful small sized vehicle (the Focus) that allowed them to recover (without direct government bailouts) and eventually return their stock price to about 12 dollars which is where it stands today.

Electronic Arts is comparable to Ford in this regard. It is diversifying. It is trying desperately to get into the MMORPG market with SWTOR. That is a good sign. And I myself am willing to continue to bet some money on the hope that this will turn their company around.

If you’re looking for an automobile giant comparison for Activision Blizzard look at Toyota. Toyota was seen as well entrenched and as having the ability to destroy the American car companies in quality. But a series of horrible recalls required them to admit that they are not as good as people thought. There are many analogies to be made here with Activision Blizzard and WOW and Cataclysm. (Or maybe ATVI will be more like Honda and just kick the crap out of everyone idk. But I like SWTOR and I am going to lean on that feeling.)

So should you invest in Electronic Arts? The answer here is not so matter of fact. Personally, I am going to maintain my investment. It is a risky investment. You should know that going in. Any company that has had this amount of horrible past financial performance is going to have a lot of risk. But if it survives, it could thrive. THQ is down for the count soon. Who else is going?



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