Videogame publisher Electronic Arts Inc. (NASDAQ:EA) has come a long way in recent years. Back in 2012 and 2013, EA was dubbed the “Worst Company in America” according to an online poll at the Consumerist, even beating out companies like Bank of America Corp (NYSE:BAC) in the wake of the subprime market crash.
Gamers have yet to forget EA’s past, and the company reminds them occasionally of just how bad things used to be. For example, see the recent shutdown of fan favorite Visceral Studios or the forced closure of fan-run servers for legacy Battlefield games.
Click to EnlargeStill, EA stock has garnered enough good will with its key hardcore gaming consumer base to put up solid numbers this year. In fact, the EA stock price has rallied nearly 50% so far in 2017, driven by solid performance from key titles like Star Wars Battlefront, FIFA and the Madden NFL series.
Furthermore, Star Wars Battlefront 2 is slated for release on Nov. 17, and preorders for the highly anticipated sequel have been “Impressive … most impressive.”
That said, the closure of Visceral Studios in mid-October left both analysts and gamers in dismay. The division’s closure left a much anticipated Star Wars game in limbo, and prompted several analysts to lower their expectations for fiscal 2019, which starts in April for EA.
Electronic Arts has an opportunity to realign those expectations after the close tomorrow afternoon. The company will step up to release its fiscal second-quarter earnings report, with analysts looking for a profit of 54-cents-per-share on revenue of $1.18 billion. Meanwhile, the “earnings whisper” on the Street is at 58-cents-per-share.
Bullish sentiment is pervasive in the brokerage community. For instance, Thomson/First Call reports that 18 of the 24 analysts following EA stock rate it “buy” or better, with no “sell” ratings to be found. But, there’s room for improvement as well, with the 12-month consensus price target of $127.40 handing out only a 8.9% premium to Friday’s close.
In the options pits, speculative traders are also betting big on Electronic Arts. At last check, the November put/call open interest ratio for EA rested at 0.41, with calls more than doubling puts among near-term options.
Overall, weekly Nov. 3 implieds are pricing in a potential post-earnings move of about 5.6%. This places the upper bound near $123.60, while the lower bound rests near $110.40. A post-earnings rally would push EA above resistance at $120, while a decline would still leave the shares some wiggle room to consolidate above support at $110.
Two Trades for EA Stock
Call Spread: Those traders looking to join the bullish contingent and ride EA stock’s rally higher might want to consider a Nov $120/$125 bull call spread. At last check, this spread was offered at $1.32, or $132 per pair of contracts. Breakeven lies at $121.32, while a maximum profit of $3.68, or $368-per-pair-of-contracts — a potential return of 178% — is possible if EA stock closes at or above $125 when November options expire.
Put Sell: However, if you’re not sold on Electronic Arts’ rally, or if a more neutral-to-bullish stance fits your outlook for the EA earnings report, a Nov $110 strike put sell may be more of a fit. At last check, this put was bid at $1.42, or $142-per-contract. If EA stock closes at or above $110 by expiration, traders entering this position will retain the premium received for opening the position.
However, if EA stock trades below $110 ahead of expiration, then traders may be assigned 100 shares at a price of $110-per-share, for every contract sold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
