Why Microsoft’s Huge Quarter Is Great News for Electronic Arts

Microsoft (NASDAQ:MSFT) just had its most successful gaming console launch in company history. The launch of Xbox Series X and Series S helped drive an 86% increase in Xbox hardware revenue during the holiday quarter. The stellar results shouldn’t be a surprise, given that the new consoles, including Sony‘s (NYSE:SONY) PlayStation 5, have been consistently sold out at retail stores since launching in November.

This is fantastic news for top video game maker Electronic Arts (NASDAQ:EA), which is hoping to ride the coattails of demand to fuel growth with its EA Play subscription service and new game sales this year.

The Xbox Game Pass and EA Play logos displayed against a backdrop of game art from EA's franchise library.

Image source: Microsoft.

Robust demand for gaming

EA Play is part of EA’s multiplatform strategy to expand its player network, which stood at 330 million unique accounts as of November. The company is using EA Play to make its catalog of titles more accessible and grow its player base even further, which, in turn, should increase the customer base for new releases.

Microsoft launched cloud gaming with Xbox Game Pass Ultimate in September. The Ultimate plan, featuring Microsoft’s cloud gaming technology, allows members to play select console titles on PC and Android mobile devices.

EA Play on Game Pass is a huge opportunity for Electronic Arts. Game Pass added 3 million new subscribers in the last quarter, bringing the total to 18 million. Before launching on Game Pass, EA Play already had 6.5 million subscribers. EA believes it can double that over the next year.

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During the holidays, Microsoft started offering free access to EA Play to Game Pass Ultimate subscribers. Microsoft is clearly using EA’s content as a hook to get players to sign up for a subscription to Ultimate, which reflects EA’s strong position as a content provider.

EA Sports titles are on fire. In November, EA reported that Madden had 30% more players compared to the year-ago quarter, while FIFA 20 had reached 35 million players on console and PC. These titles, plus dozens more from EA’s catalog, are available through EA Play.

While subscriptions are a long-term growth opportunity, EA Play is currently a very small part of EA’s business. Sales of new releases in the short term will be more vital to the company’s performance in calendar 2021.

Upcoming games

EA plans to launch at least six new games on the Xbox Series X and PlayStation 5 in fiscal 2022 (which ends in March). These will include a Need for Speed title and a new installment in the Battlefield series. Management expects full-game sales to comprise 29% of total bookings (a non-GAAP measure of revenue) for fiscal 2021.

Sales for these upcoming releases, especially Battlefield, are looking great right now, since demand for new consoles naturally crosses over to games. Microsoft said that sales of third-party titles on Xbox exceeded $2 billion for the first time last quarter, pointing to growing demand for new games.

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The video game industry is continuing to benefit from the positive tailwinds that started during the pandemic. We’ll see what happens to player engagement trends once schools fully reopen across the U.S., but for now, the momentum in the gaming industry benefits the largest companies, like Electronic Arts, that have the biggest franchise brands on the market. For fiscal 2021, EA expects total bookings to grow 10.7% over fiscal 2020.

EA reports fiscal third-quarter earnings on Tuesday, Feb. 2, after the market closes. Investors should watch for updates on how EA Play is performing, as well as engagement trends for the company’s top franchises.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

View more information: https://www.fool.com/investing/2021/01/30/why-microsoft-earnings-great-news-electronic-arts/

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