Electronic Arts, Inc. (NASDAQ:EA) has seen quite a bit of bad press over the past quarter. The company had to back away from in-game microtransactions in Star Wars Battlefront II following a revolt from gamers. The move away from microtransactions prompted analysts to lower earnings forecasts and sent Electronic Arts stock plummeting.
But that negativity is now fully baked into Electronic Arts stock. The company has an opportunity to set investors’ minds at ease when it reports quarterly earnings today.
EA is expected to post a profit of $2.19 per share, down from $2.48 per share in the same quarter last year. Revenue is expected to fall 3% to $2.01 billion. Prior to the Battlefront II debacle, these figures were a touch higher as analysts priced in the impact of microtransactions.
But there may have been an overreaction to their impact on quarterly earnings. In fact, the whisper number rests at $2.27 per share — 6 cents higher than the consensus. What’s more, guidance should be the real driver here. After all, Electronic Arts only suspended microtransactions in Battlefront II … they will return to the game eventually, and in a much more palatable form for gamers.
Sentiment leading up to the report is flush with bullish expectations. For instance, Thomson/First Call reports that 22 of the 27 analysts following EA stock rate it “buy” or better, with no “sell” ratings to be found. Meanwhile, the 12-month consensus price target of $129.46, leaving plenty of upside before valuation becomes a concern.
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In the options pits, Electronic Arts stock options traders are quite bullish on EA’s post-earnings prospects. At last check, the Feb. 2 put/call open interest ratio came in at 0.63, with calls on the verge of doubling puts among options most affected by tonight’s quarterly report.
Overall, implieds are pricing in a potential post-earnings move of about 6% for EA stock. This places the upper bound near $124, while the lower bound rests near $110. A rally would push EA above resistance in the $120-$122 region, while a decline would still leave the shares some wiggle room to consolidate above support at $110.
2 Trades for EA Stock
Call Spread: Those traders looking bet bullish on Electronic Arts ahead of earnings might want to consider a Feb $120/$125 bull call spread. At last check, this spread was offered at $1.72, or $172 per pair of contracts.
Breakeven lies at $121.72, while a maximum profit of $3.28, or $328 per pair of contracts — a potential return of 91% — is possible if EA stock closes at or above $125 when February options expire.
Put Sell: If you’re not sold on EA’s rally, or if a more neutral-to-bullish stance fits your outlook for Electronic Arts earnings report, a Feb $110 strike put sell may be more of a fit. At last check, this put was bid at $1.24, or $124 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.
