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Video games have become the world’s most lucrative global entertainment medium, but the top players in the industry are unknown when compared to movie directors and TV showrunners.
Take Vince Zampella, who is responsible for the creation of three billion dollar franchises, including the original Duty and Modern Warfare, both of which are among the most successful games in history. Zamella also made Apex Legends as head of Respawn, his independent studio that
Electronic art
(ticker: EA) wisely acquired in 2017. Earlier this year, EA announced that: Top had over $2 billion in bookings.
Veteran Wedbush video game analyst Michael Pachter told me he once bumped into Zampella at Disneyland and couldn’t believe that one of the most successful game makers ever—one who changed the course of pop culture—walked through the theme park unrecognized.
I bet most investors and fund managers don’t know who Zampella is either. They should.
“What’s unique about Vince is that everything he touches turns to gold,” said Geoff Keighley, creator of The Game Awards, the Oscars of the video game world. “Regardless of genre or platform, he is able to rally the team to make a great game. He has pretty much a perfect track record.”
Modern game development is no mean feat, and it’s full of game makers failing to achieve repeated success. Executives have to deal with hundreds of animation, fine arts, narrative writing and programming specialists, while dealing with budgets that often exceed $100 million.
Zampella has not sought the limelight and rarely talks to reporters outside of the game world. He finally agreed to talk to me after months of interview requests. I asked how he managed to make multiple hits. “We absolutely reiterate and really try to understand what’s fun,” Zampella says. “It’s not the best idea that wins; it’s the best performance that wins.”
He also stressed the importance of finding the best talent. “You hire great people and make them shine,” he says. “Don’t control what they do. You open the doors for them and let them do what they do best.”
The good news for EA shareholders is that the company has begun to transfer more of its gaming properties to Zampella. Late last year, after a string of disappointing releases, the company handed over responsibility for the legendary Battlefield franchise to Zampella, which he will oversee along with Respawn’s games. Last week, EA announced the addition of another studio called Ridgeline Games which is headed by Zampella.
Some on Wall Street see the potential for Zampella to revolutionize EA. BofA Global Research analyst Omar Dessouky, who has a buy rating and a $155 price target for the stock, says he is involved in Battlefield should turn the company into a “shooter powerhouse” over time. Pachter agrees and has an Outperform rating on EA with a target of $170. “I’m confident EA will get its mojo back thanks to Vince.”
Zampella’s work isn’t the only reason to be optimistic about EA stock, which recently traded for $129. In May, this column featured EA as a game in the multi-year cycle of video game consoles. I also noted that it was one of the few major independent game companies left and able to attract takeover attention. Both ideas remain in play.
Since the column, EA stocks have outperformed, rising 12% in a volatile market and outperforming the Nasdaq Composite by 12 percentage points. There is probably more upside.
The outlook for the console market has also improved with:
Sony
(SONY) announces plans to increase production of PlayStation 5 consoles by at least 50% for the fiscal year ending March 2023, citing a decrease in the chip shortage. More consumer-owned hardware should generate more revenue for software publishers, boosting EA’s fortunes.
Investors should not underestimate the potential of an EA takeout. Earlier this year there was a flurry of merger and acquisition activity, with
Take-Two interactive software
(TTWO) buys mobile game maker Zynga and Sony acquires private game developer Bungie. The biggest deal of all was
Microsoft
‘s
(MSFT) deal in January to buy
Activision Blizzard
(ATVI) for $69 billion.
EA could be next on the shopping list as major companies clamor to be a part of video gaming’s promising prospects. According to Newzoo, the global games market is expected to grow to $226 billion by 2025, from $197 billion this year. EA has “incredible scarcity,” says Dessouky. EA recently told Barron’s that it does not comment on takeover speculation.
Certainly, an economic downturn could complicate the picture for EA. But video games are one of the cheapest forms of entertainment on an hourly basis, and the category can be more resilient than other consumer products.
EA stock is trading at a reasonable 16 times projected earnings for the fiscal year ending March 2024. That valuation underestimates the potential for several years of double-digit growth as EA has the wind in its sails from a robust console cycle and a revived games pipeline.
Microsoft is largely trying to buy Activision for its Duty brand, where much of the company’s value lies. But it won’t get Zampella, who’s busy making the next one Duty-type hit for EA.
Microsoft may be buying the wrong company.
Write to Tae Kim at tae.kim@barrons.com
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