Electronic Arts Earnings Preview (EA)

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Armed with a bevy of best-selling video game franchises — the Madden NFL, Need for Speed and Battlefield series, to name but a few — and coming off the trailer launch of the heavily anticipated shooter game, Star Wars: Battlefront, everything suggests that life is pretty swell for Electronic Arts Inc. (NASDAQ:EA).

Most importantly, at least from the shareholders’ perspective, EA stock has stormed the markets, moving up 26% since the beginning of the year. But the competition and recent developments within the stock market pose significant challenges for Electronic Arts.

On the fundamental side, the company’s earnings performances have been very strong, beating consensus estimates 14 times out of the last 15 reporting quarters. Electronic Arts is currently on a seven-hit winning streak, and Todd Mitchell, an analyst for Brean Capital and a category specialist for the gaming industry, is banking on the trend. He believes that upcoming earnings results for the fourth quarter — to be released on May 5 — will again exceed Wall Street expectations.

However, some analysts hold lukewarm projections for EA stock. Despite the enormous popularity of Electronic Arts’ Battlefield series of first-person shooter games, Mitchell points out, the last two releases were the weakest in the franchise. This adds serious pressure, considering the already fierce competition with Activision Blizzard, Inc. (NASDAQ:ATVI) for dominance in the genre.

Electronic Arts, EA, earnings
Source: Source: JYE Financial, unless otherwise indicated

Adding to the bearish argument is the performance of EA stock after earnings are released. Although there is no disputing the fact that Electronic Arts has been a huge winner since the summer of 2012, its ability to rally after an earnings report has been in decline since May of 2013.

Furthermore, the momentum of EA stock heading into earnings has also waned over the past three quarters, suggesting that its shares are becoming top heavy.

Another indication that the markets are expecting a correction for Electronic Arts is the inability for EA stock to push past previous highs. Shares need a decisive catalyst to break upper resistance; otherwise, there is a risk that the price could tumble down into a bearish trend channel.

Electronic Arts, EA, chart
Source: Source: JYE Financial, unless otherwise indicated

Surprisingly, the statistical likelihood that shares will trade at a higher price by the next earnings report is fairly marginal. Using the past 90 day average performance of EA stock, there is only a 55% probability by August of this year, investors who buy shares today will end up profitable. Also, the risk-reward balance is split down the middle: Betting correctly leads to average gains of 13% but betting incorrectly leads to average losses by the same magnitude.

Electronic Arts is a tough one to call. On one side, there is the enormously bullish performance over the past two years. On the other hand, all good things must come to an end. Recent evidence does suggest that EA stock is setting itself up for an overdue correction, and therefore, it’s a candidate to sell.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2015/05/electronic-arts-ea-stock-overbought/.

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