EA Offers Star Wars Expansion Pack - Analyst Blog

Electronic Arts EA continues to perform well in 2014. Although it faced a minor hiccup over its latest launch Titanfall, shares have increased 30.3% year-to-date. The surge in share price reflects EA's innovative product pipeline and continued growth in the digital segment.

The video game developer continues to solidify its position in the free-to-play gaming market. EA recently released a new digital expansion pack for Star Wars: The Old Republic called Galactic Strongholds. EA is also offering a number of bonuses and special rewards to attract hardcore gamers.

The expansion pack is EA's latest initiative to boost the game's popularity after it launched the Star Wars' free-to-play version in 2012. In April 2013, EA released Star Wars first digital expansion pack called Rise of the Hutt Cartel. Galactic Starfighter was the next expansion that was offered as free-to-play in February this year.

By releasing new expansion packs every year, EA seeks to capture gamers' imagination and keep their interest in the franchise alive. So far, EA has always benefited from the launch of digital content and expansion packs. Although offered for free, EA earns revenues through micro-transactions and advertisements.

In the third quarter of fiscal 2014, revenues from extra content and free-to-play games increased 15.0% year over year to $213.0 million driven by continued growth in FIFA Ultimate Team, FIFA Online 3 and Star Wars: The Old Republic. Overall, digital revenues jumped 27.0% year over year to $517.0 million (33.0% of revenues) in the quarter.

We believe that with a wide array of titles and massive fan following, EA is better equipped to gain traction in the free-to-play segment than most of its peers. Per market research firm Superdata, in Feb 2014, the free-to-play segment's revenues increased 22.0% year over year to $291.0 million.

The market research firm remains positive on the segment's growth and estimates that the emergent category of racing games will reach $255.0 million in worldwide sales by 2015. EA's free-to-play Need For Speed World is one of the most popular games in this genre.

We believe EA's strong digital portfolio and continuing growth in the tablet and smartphone market are the key growth catalysts. However, the company faces intensifying competition from the likes of Activision Blizzard ATVI, Take-Two Interactive TTWO, Zynga ZNGA and Ubisoft .

Additionally, higher consumer spending on new consoles may cannibalize software sales in the near term. We, therefore, remain cautious on EA's fourth-quarter revenue guidance.

Currently, EA has a Zacks Rank #3 (Hold).