Investopedia: Will Social Gaming Keep Electronic Arts Relevant?

The fad of the day is social and mobile gaming, and investors are more than a little fired up over the upcoming IPO of Zynga. While some people dread seeing notifications from games their friends are playing on platforms like Facebook, others cannot get enough of them and buy smartphones and tablets, in part on their ability to support gaming. Not wanting to get left behind, Electronic Arts (Nasdaq:ERTS) is making a major financial commitment to becoming a player in this space.


The Latest Deal
Electronic Arts announced Tuesday night that it would acquire PopCap Games, publisher of games like Plants vs. Zombies and Bejeweled, in a cash-and-stock deal. Electronic Arts will be paying $650 million in cash and $100 million in stock up front for the privately held Seattle-based game company. But scaled earn-outs could push the total deal price north of $1.3 billion if PopCap delivers cumulative two-year operating income of over $343 million.

Any way you slice it, this is a rich valuation on the fundamentals. PopCap does boast over 150 million installed games, but it produced about $100 million in revenue last year (though reportedly with a growth rate in the vicinity of 40%). To the extent that traditional game publishers like Electronic Arts, Activision Blizzard (Nasdaq:ATVI) or Take-Two (Nasdaq:TTWO) are comparables, the 7.5 times trailing sales that Electronic Arts is paying (just based upon upfront consideration) is about triple the going rate. 




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