EA Declares ‘Game On’ Amid Pandemic Shutdown
Most of the physical world is being transformed by the COVID-19 pandemic. Nothing could offer a better example of this than in the sports world. Entire leagues have been shut down and many professional sports stadiums sit empty for the first time ever.
But now, live professional sports is getting its digital makeover.
Electronic Arts (Nasdaq: EA, Rated “C+”), the National Football League and the NFL Players Association announced Thursday a multiyear agreement to create exclusive digital content for professional football.
It’s a huge new opportunity for Electronic Arts shareholders.
Digital transformation is something we now take for granted in the corporate world. In the wake of the novel coronavirus, webcams and a network of cloud-based software companies helped hundreds of large enterprises flip the switch on working from home.
Zscaler (Nasdaq: ZS, Rated “D”), a cloud-based cybersecurity platform, for example, helped Siemens secure remote connections for 300,000 employees over a single weekend, according to CEO Jay Chaudhry. He explained the project was possible because nimble software companies have been rethinking the architecture of virtualization.
The deal between Electronic Arts, the NFL and its players follows this trend. It’s a major rethink of the way fans interact with professional sports and it’s likely to create unimaginable new value for stakeholders.
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The point of the spear is the wildly successful Madden NFL video game franchise. According to a corporate press release, it’s more popular than ever since its creation 32 years ago.
In March, unique players grew by 30% year-over-year. Monthly players reached a record high, accounting for 330 million hours of gameplay. Madden NFL eSports, a business dedicated to broadcasting live, head-to-head gameplay by professional gamers, has seen viewership soar. Tournaments, including events with NFL players, have drawn millions of viewers on ESPN, ESPN2 and FS1.
Obviously, the world is in a unique situation. COVID-19 landed hundreds of millions of people at home with a lot more free time. Professional sports leagues have been shuttered. New content from Hollywood is on hold, too. Broadcasters are desperate for content.
Electronic Arts is filling the void with eSports. The content helps the NFL reach out to younger people who have been turning away from the pro football fandom. It helps star players build their personal brands with a wider demographic and EA is able touch new football fans who are unfamiliar with video game culture.
Best of all, it’s a concept that can be duplicated with other sports leagues across the globe.
FIFA 20 is the latest version of EA’s soccer simulation software. Since 1993, it has been the most popular video game among followers of the world’s most popular sport. In the United Kingdom in September 2019, FIFA was the top-selling video game, period.
During the pandemic, Electronic Arts managers have been reaching out to professional soccer clubs. The eSports division is staging online tournaments to draw new and hardcore gamers by pairing teams of celebrity pro athletes with professional gamers.
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The connection between celebrity and authenticity, according to a story at VentureBeat, is a big part of a wider strategy to make the best of an influx of new eSports players and viewers.
Engagement is an often forgotten part of the video game business. The Washington Post noted that Twitch, an online video game viewing platform, had 1.5 billion hours viewed during April, a stunning 50% increase over March. The Amazon.com (Nasdaq: AMZN, Rated “C+”) unit accounts for 1.8% of peak internet traffic, behind only Netflix (Nasdaq: NFLX, Rated “C”), YouTube and Apple’s (Nasdaq: AAPL, Rated “C+”) web of internet portals.
For perspective, watching other people play video games online consumes more bandwidth than Hulu, Facebook (Nasdaq: FB, Rated “C+”) and Amazon.com.
Electronic Arts is building a new business vertical to take advantage of that enthusiasm, and it has the blessing of professional sports leagues and its best influencers.
When the league signs an exclusive marketing arrangement, or the NFLPA lends its stars to Madden branding, an implicit endorsement is being made. It’s like every NFL star wearing the Nike swoosh.
Investors are vastly underestimating the potential financial value to Electronic Arts.
Shares trade at only 21.9 times forward earnings and 6.4 times sales. In fiscal 2020, the company earned $3 billion in profits on only $5.5 billion in sales. And Refinitiv, a data researcher, found that analyst earnings expectations have risen 99% since the last quarter. They expect revenues to reach $6 billion in 2021 and grow 14.5% in 2022.
The stock is up 14% in 2020, but the real gains lie ahead as managers begin to exploit relationships with live sports. Shares could trade to $195 within two years, a gain of 61% from current levels.
Growth investors should consider buying Electronic Arts on pullbacks.
Jon D. Markman