“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, October 08, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

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Option Trade – Electronic Arts Inc. (NASDAQ:EA) Calls

Monday, October 08, 2018

** OPTION TRADE: Buy the EA JAN 18 2019 120.000 CALL at approximately $5.30. Place a pre-determined sell at $10.60.

Also include a protective stop loss of $2.10.

Electronic Arts Inc. (NASDAQ:EA), a game software content and services provider, has been receiving a lot of positive attention from analysts of late. Last week saw Berenberg initiate coverage on Electronic Arts with a "buy" rating and $145 price target -- about 27% premium to Friday’s close. The brokerage firm said it was "deeply excited" about the video game sector, citing e-sports as a positive catalyst for revenue growth. This bull note is offset news of rape allegations against EA-sponsored soccer star Cristiano Ronaldo.

Most analysts are already upbeat on Electronic Arts, with 17 maintaining a "buy" or better rating, compared to five that say the equity's a "hold". Plus, the average 12-month price target for EA is very high at $142.38.

Electronic Arts has a solid history of beating earnings estimates and is in a good position to maintain the trend in its next quarterly report.

The recent earnings report from EA has illustrated the powerful impact of increased digital spending and the rising popularity of gaming in general. EA said in late July that digital bookings jumped 13% in the fiscal first quarter, thanks in part to a surging user base for the latest release in The Sims franchise. The tilt toward more profitable subscription services, meanwhile, has helped push margins higher while lifting annual operating cash flow to over $1.8 billion, up from $1.5 billion two years ago.

A buying opportunity exists now after what management said about its core business, which includes its EA Sports titles (Madden NFL and FIFA), Ultimate Team, and other popular games like The Sims 4. In the press release, EA stated that these core games "are expected to continue their strong operational performances."

This is important because it was the strong performance out of these core games that saved EA's holiday quarter last year following very poor sales of the highly anticipated Star Wars: Battlefront 2, which was released in November of last year.

EA's diversification across a deep catalog of titles anchored by its EA Sports titles fueled a 23% growth rate in live service revenue (which is what EA calls in-game spending) during the holiday quarter last year. The better-than-expected third quarter sent its shares up 7% to a new all-time high the day after the earnings report in late January.

About Electronic Arts…..

EA was listed on the stock market in 2013 when it was voted the worst company in the United States. It also reduced its revenue forecast $350 million for fiscal 2019. However, the stock has risen from $26 in 2013 to an all-time high of $151 earlier this year.

Electronic Arts Inc develops, markets, publishes, and distributes games, content, and services for game consoles, PCs, mobile phones, and tablets worldwide. The company develops and publishes games and services across various genres, such as sports, first-person shooter, action, role-playing, and simulation primarily under the Battlefield, Mass Effect, Need for Speed, The Sims, and Plants v.

Past Performance…..

When looking at the last two reports, this video game maker has recorded a strong streak of surpassing earnings estimates. The company has topped estimates by 173.62%, on average, in the last two quarters.

For the most recent quarter, Electronic Arts was expected to post earnings of $0.06 per share, but it reported $0.26 per share instead, representing a surprise of 333.33%. For the previous quarter, the consensus estimate was $1.15 per share, while it actually produced $1.31 per share, a surprise of 13.91%.

Future Earnings…..

Analysts expect that Electronic Arts will announce $1.18 billion in sales for the current fiscal quarter. Electronic Arts also reported sales of $1.18 billion in the same quarter last year. The company is expected to report its next earnings results on Tuesday, October 30th.

Also, Wall Street analysts expect Electronic Arts to report earnings of $0.59 per share for the current fiscal quarter. Electronic Arts posted earnings per share of $0.66 in the same quarter last year, which would indicate a negative year over year growth rate of 10.6%.

Influencing Factors…..

Recent estimates have been moving higher for Electronic Arts. In fact, the Earnings ESP (Expected Surprise Prediction) for the company is positive, which is a great sign of an earnings beat.

Electronic Arts has an Earnings ESP of +4.15% at the moment, suggesting that analysts have grown bullish on its near-term earnings potential. Another beat is possibly around the corner. The company's next earnings report is expected to be released on October 30, 2018.

Since their quarterly reports in late July, EA was forced to delay the launch of Battlefield V, one of its biggest releases of the year, by four weeks. It will now debut in late November.

It's important to note that EA's earnings power isn't at risk, as the company still expects to book most of its expected Battlefield V revenue, but just in later quarters. The company suffered from a disappointing release for its Battlefront game last year, after all, but still managed to post solid sales and profit gains. 

Moving Ahead…..

Electronic Arts has just released FIFA 19, the latest in its hugely popular football series, in the hope of boosting its revenues following a challenging year for the company.

Launching on September 28, FIFA 19 will be one of the biggest video game launches of the year. Last year’s version of the game, FIFA 18, sold over 24 million copies across its lifetime and made $3bn (£2.3bn) worldwide. The money in that figure came from both sales and money spent on in-game purchases of player packs in its hugely popular FIFA Ultimate Team mode.

Across the series' 25-year history, FIFA has sold over 260 million copies; making it the world’s highest selling sport game in history. According to industry analysts, this year’s game looks likely to continue the series' success, with the addition of a fully-licensed Champions League and an improvement to the core gameplay impressing critics.

Additionally, EA has introduced its cutting-edge technology, Real Player Motion (RPM) to NHL 19, which is already seen in games like FIFA 18 and UFC 3. The technology enables users to experience real life gaming and most responsive gameplay ever in the franchise’s history.

Moreover, users can now form teams and play with and against 200 hockey Legends to be part of the ultimate gaming experience.

EA now views eSports as a lucrative vertical that could drive its revenue. Its Origin Access Premier, a subscription model available for $14.99 per month, allows players to access a huge library of video games.

With this move, EA is looking to become the so-called Netflix of gaming where subscription revenue will lead to a more stable stream of recurring income.

Analysts and Hedge Funds Opinions

Equities researchers at Buckingham Research started coverage on shares of Electronic Arts in a research report issued last Thursday. The brokerage set a “buy” rating and a $143.00 price target on the game software company’s stock. Buckingham Research’s price target points to a potential upside of 25.74% from the stocks previous close.

Also, BidaskClub upgraded shares of Electronic Arts from a sell rating to a hold rating in a report published on Friday, September 28th.

Several other equities analysts have recently commented on the company…..

Barclays set a $132.00 target price on shares of Electronic Arts and gave the stock a “buy” rating in a report on Wednesday, September 5th.

Piper Jaffray Companies reduced their target price on shares of Electronic Arts from $165.00 to $148.00 and set an “overweight” rating for the company in a report on Thursday, August 30th.

Needham & Company LLC reduced their target price on shares of Electronic Arts from $170.00 to $150.00 and set a “buy” rating for the company in a report on Friday, August 31st.

Finally, Stifel Nicolaus reduced their target price on shares of Electronic Arts from $159.00 to $140.00 and set a “buy” rating for the company in a report on Tuesday, September 11th.

Two investment analysts have rated the stock with a sell rating, five have issued a hold rating, twenty-two have issued a buy rating and one has issued a strong buy rating to the company’s stock. The company presently has an average rating of “Buy” and a consensus price target of $142.38.

Summary

Robust revenue growth, driven by a strong portfolio of games and increasing margins, has benefited EA stock. The shift to digital gaming led to an increase in the bottom lines for EA and its peers.

Electronic Arts Inc. has a fifty-two week low of $99.63 and a fifty-two week high of $151.26. The firm has a market cap of $36.73 billion, a PE ratio of 33.06, and a price-to-earnings-growth ratio of 2.07 and a beta of 0.58. The company has a debt-to-equity ratio of 0.19, a quick ratio of 3.84 and a current ratio of 3.84.






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