It’s Electronic Arts’ (NASDAQ:EA) turn at the earnings altar this week. Let’s take a look at what Wall Street and other investors are expecting, the EA stock price chart, and a risk-adjusted position for the event.
Video game giant EA stock is set to report earnings for its second quarter Tuesday night. The company behind popular licensed franchises from “Star Wars” to “The Sims,” well-played FIFA and the NFL titles, and a powerhouse in the growing esports space is expected to deliver profits of 86 cents per share based on Street consensus estimates. Sales are forecast to come in at $1.2 billion.
By comparison Electric Arts stock earned 97 cents in the second quarter of 2018 or 11 cents more than 2019’s forecasted earnings. At the same time revenues are expected to come in flat from the year-ago period. To be clear, growth has slowed in EA. But the global gaming market is still big business.
The gaming industry is valued roughly at $135 billion and growing in the high single-digits. And Electronic Arts has proved itself a durable champion in the space. Still, some like InvestorPlace’s Thomas Niel are worried. Thomas frets over EA stock’s valuation and a market cap of $28 billion as too big to be bought by the likes of Disney (NYSE:DIS). And Barclay’s analyst Deepak Mathivanan cut shares this past week on concern Electronic Arts needs a new non-licensed hit game.
Respectfully, the worries in EA stock appear misplaced. Bottom-line, EA stock is more or less valued alongside peer Activision Blizzard (NASDAQ:ATVI) and below Take Two Interactive (NASDAQ:TTWO). Further, at 19x forward earnings, projected growth of 9% next year and plenty of cash flow, EA stock doesn’t need to be acquired.
What’s more, with EA stock’s popular free-to-play “Apex Legends 3” out and licensing rights with Disney into 2023 with an all-but-certain next hit in “Star Wars Jedi: Fallen Order” out in mid-November, it’s game on right now in Electronic Arts.
EA Stock Weekly Price Chart
The price chart is another reason to be bullish on EA stock. Shares of Electronic Arts have been channeling in a downtrend for most of 2019, but follows 2018’s large corrective bear market which bottomed out in a key, longer-term Fibonacci support zone.
The interpretation is a breakout of nearby channel resistance will quickly find EA hitting new year-to-date highs and continuing to rally firmly in the right side of the large corrective base.
Playing EA Stock
With earnings on tap it’s expected the event will act as the catalyst for Electronic Art stock’s bullish change of character. As EA has proven itself to be a volatile mover following its quarterly reports and potential for channel resistance to be easily cleared, being positioned long in front of the event looks compelling.
Still, earnings reactions work both ways, and resistance, until overcome, is still an obstacle on the price chart. For investors comfortable with this type of risk, rather than buying EA stock for the event I favor approaching exposure with the December $105 / $110 call spread.
This particular vertical is priced for 90 cents with Electronic Arts shares at $96.85. The position limits risk to less than 1% of owning EA stock while packing powerful profit potential of $4.10 and a maximum return of 455% if shares can climb 13.50% over the next two months into expiration.
Investment accounts under Christopher Tyler’s management do not currently own positions in securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits