Electronic Arts (NASDAQ:EA) has won the coveted license to produce Star Wars video games from The Walt Disney Company (NYSE:DIS). This agreement gives Electronic Arts (NASDAQ:EA) the rights to develop new Star Wars titles for game consoles, computers and mobile devices. News of the agreement sent Electronic Arts’ stock climbing higher by 2.8% in after-hours trading following the announcement.
Second times a charm
This will be the second go-around for Electronic Arts (NASDAQ:EA) and Star Wars in recent years. Electronic Arts launched Star Wars:The Old Republic two years ago, a massively-multiplayer online roleplaying game that cost the company $300 million to develop. In the end, the game also cost then-CEO John Riccitiello his job. He resigned in March after the company failed to meet quarterly estimates due to lower-than-expected popularity and subscriber retention. The Star Wars MMO simply didn’t attract and keep enough paying subscribers, forcing Electronic Arts (NASDAQ:EA) to launch a free-to-play version to attract additional players.
Deal is a win-win for both sides
The new licensing agreement works out well for both companies. For Electronic Arts (NASDAQ:EA), the deal provides added credibility to the company’s standing as one of the world’s premier game developers since there are few if any franchises that are more valuable than Star Wars. “Every developer dreams of creating games for the Star Wars universe,” says Frank Gibeau, president of EA Labels.Electronic Arts’ studios DICE (Battlefield), Visceral Games (Dead Space) and BioWare (Mass Effect) will all developStar Warstitles, with BioWare already having experience in the universe through titles such as The Old Republic MMO and the original Knights of the Old Republic game.
For The Walt Disney Company (NYSE:DIS), the deal allowed the company to retain certain rights relating to the development of new titles within the mobile, social, tablet and online game categories. Though it could have retained the full rights after buying Lucasfilm and the Star Wars franchise, the company had previously announced that it would shutter LucasArts, the San Francisco-based game-making branch of Lucasfilm, and license the franchise to other companies instead of developing new games internally.
Opportunity for a fresh start
With this new agreement, Electronic Arts can start with a clean slate on Star Wars. Over the past few years, the company has made significant investments into research and development with the intent of developing MMO games. The goal is to allow gamers from all over the world to participate together in real-time gaming in a virtual world. This is important since Electronic Arts’ chief competitor, Activision Blizzard (NASDAQ:ATVI), has already mastered this dynamic with its popular World of Warcraft and Call of Duty franchises.
Electronic Arts’ hope is that its Star Wars games will allow the company to build new franchises similar to what Activision Blizzard (NASDAQ:ATVI) has done with its games. The company can go back to the drawing board from its previous attempts, creating games that will hopefully bring Star Wars fans and MMO gamers to Electronic Arts. While its previous attempt at this stumbled early on, the company hopes that its R&D efforts will now give it the infrastructure to make this happen.
Comparison of the two companies
In comparing Electronic Arts with Activision Blizzard, we see that Activision Blizzard has a much larger market cap and is more profitable overall. Activision Blizzard has a market cap of $16.64 billion and net income of $1.12 billion on revenue of $4.86 billion.
Electronic Arts has a market cap of $5.52 billion and net income of only $175 million on revenue of $3.96 billion. Electronic Arts is undervalued compared to Activision Blizzard, however, with Electronic Arts trading at only 1.4 times its sales and has a price-to-earnings-to-growth ratio of 1.37. Activision Blizzard trades at 3.43 times its sales and has a higher PEG ratio of 2.26.
Foolish assessment
I think that the Star Wars deal will be a boost for Electronic Arts. The company has learned from mistakes that it made with its previous Star Wars effort and shouldn’t make the same mistakes twice. With the former CEO gone, I think that the company will get it right this time and expect that both the margins and profits at Electronic Arts will increase as a result.
The article A Match Made in Star Wars Heaven originally appeared on Fool.com and is written by Mark Yagalla.
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