EA's 'Klick' for Social Games

KlickNation is the latest acquisition by Electronic Arts Inc. (ERTS), aka EA, to strengthen its portfolio and thus generate better traction in the high-in-demand social gaming arena. This would be EA’s second acquisition in the social gaming circuit after it acquired PopCap Games in July 2011. The company had entered the segment with the acquisition of Playfish way back in 2009.

KlickNation develops and publishes free to play games for social networking platforms and has Facebook as one of its clients. The company operates in the role-playing games (RPG) genre. Since 2009 it also has been delivering action games like Age of Champions (the game has140k monthly active users in Facebook) and SuperHeroCity and more recently, Six Gun Galaxy.

KlickNation will be integrated into EA’s BioWare brand to create a new social division called BioWare Social.

The acquisition by EA comes as no surprise as the company has been competing with Zynga, still the undisputed leader in the social-gaming circuit. Moreover, an eMarketer report suggests that the social gaming market in the U.S. is expected to be worth $2.18 billion in 2012 and EA is bracing itself to take a big bite of the billion-dollar pie.

Additionally, acquisitions are expected to open up new opportunities for EA and also boost the Digital revenue of the company. EA’s digital revenue is projected to be in the range of $1.15 billion to $1.20 billion for fiscal 2012.

Apart from social gaming, EA continues to expand its mobile-gaming offerings by introducing more and more free-to-play games. Most recently the company announced a partnership with Shanghai, China-based mobile advertising solutions provider, Madhouse. The partnership will enable Madhouse to deliver live advertisements into EA’s mobile games in China, by deploying its SmartMad intelligent targeting technology. EA primarily intends to expand in the huge Chinese market through diversified offerings, including social games and mobile games.

Despite the positives, EA faces stiff competition from Activision Blizzard Inc. (ATVI - Snapshot Report), which released its much anticipated Call of Duty franchise against EA’s Battlefield 3 in the holiday season. The first week sales figures of Call of Duty:Modern Warfare 3 suggests that in terms of units sold, Activision is way ahead of EA. Moreover, most experts believe that Electronic Arts will sell a total of 10-12 million units of Battlefield 3, while Activision will sell more than 25 million units of Modern Warfare 3.

Nonetheless, we believe that EA has a strong product pipeline for fiscal 2012 and beyond, which will drive top-line growth going forward. We believe that high quality titles, an impressive product line, increasing online exposure, social games and portfolio diversification guarantees market share gains over the long term. Additionally, the strategic acquisitions made by the company in the field of social and casual gaming will be beneficial in the long run.

We have a Neutral recommendation on Electronic Arts over the long term (for the next 6 to 12 months). Currently, Electronic Arts has a Zacks #2 Rank, which implies a Buy rating in the short term.