Navigating the Videogame Blizzard
Have investors been spending too much time on old videogames?
Judging by the valuation of Electronic Arts (ERTS), the answer might be yes. Even after a recent selloff, the company’s enterprise value is nine times estimated 2010 earnings before interest, taxes, depreciation and amortization. Better-performing Activision Blizzard (ATVI) is at seven times.
That premium is hard to justify given the transition underway. Activision derives roughly 30 percent of revenue and a higher portion of profit from recurring subscription fees on online multiplayer games like World of Warcraft. EA, in contrast, is more reliant on traditional packaged games, a market that shrank nine percent globally in 2009, according to EA, and that it expects to fall a further three percent this year.
