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Analyst Blog

Video game developer and publisher, Electronic Arts Inc. (EA - Analyst Report) recently announced the availability of The Sims 3 Supernatural expansion pack for sale at retailers. Players can also download the expansion pack on their personal computers.

The Sims 3 Supernatural is based in the mystic world of Moonlight Falls, a magical abode of werewolves, vampires, witches and fairies. Players can live a supernatural life as any of these characters. To make the game truly supernatural, EA has added a number of new features such as the ghost character and the alchemist game mode, which have made the pack much more attractive.

The Sims franchise was released in 2000, and ever since, the company has sold more than 150 million copies of the game and its sequels in 22 languages across 60 countries around the world. To date, the game has generated more than $3 billion in revenues for EA. We believe that the new expansion pack will boost revenue growth going forward.

Lately, frequent release of expansion packs and downloadable contents (DLCs) have been the lifeline of aging game franchises. The regular updates not only keep the customer’s interest in the games alive but also contribute significantly to the publisher’s and developer’s top-line growth.

Electronic Entertainment Design and Research (EEDAR), a video game market research firm, estimates that given the increasing popularity among the Xbox 360 and Play Station 3 console owners, DLCs will generate $1.0 billion in sales in 2012. EA, with its famous franchises and timely content pack releases, is expected to grab a chunk of this estimated DLC sales.

Activision Blizzard (ATVI - Snapshot Report), which also has some of the famous franchises of the gaming industry under its kitty, would also be eyeing a share in the billion-dollar opportunity. The company continues to launch DLCs of its popular franchise Call of Duty on a regular basis in order to boost its customer base.

We believe that the release of EA’s famous franchise games and their subsequent content enhancements will continue to benefit the company in the upcoming quarters, driving its top-line growth.

Our Take

We believe that EA is diversifying its revenue generating base. With rising consumer spending on digital gaming (social, mobile, casual), we remain optimistic on EA’s growth trends over the long term. The company is opening up new fronts in social, mobile and online gaming based on its well known franchises, which is expected to boost its customer base going forward.

We believe that EA’s innovative product pipeline will boost its market share in the online gaming market. Moreover, EA’s strong focus on the digital segment will help it stand out even amid sluggish market conditions going forward.

However, the highly fragmented video game market continues to witness increased competitive pressures, which are hurting its overall profitability. This compels us to remain Neutral on the stock over the long term.

Currently, EA has a Zacks #3 Rank, which implies a Hold rating in the near term.

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