Will Electronic Arts Stock Continue To Rise?

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With shares of Electronic Arts (NYSE:EA) trading around $25, is EA an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Electronic Arts develops, markets, publishes, and distributes game software content and services that can be played by consumers on a variety of video game machines and electronic devices. Its offers video game products through gaming consoles such as the Sony Playstation 3, Microsoft Xbox 360 and Nintendo Wii. Electronic Arts’s products can also be used on personal computers, mobile devices, tablets, electronic readers, and social networking sites which include popular platforms such has PCs, Apple Mac, Apple iPhone, Google Android, Apple iPad, Amazon Kindle, and Facebook.

On Tuesday afternoon, Electronic Arts delivered a loss for the latest quarter in earnings and decrease in revenue, however, the company still beat Wall Street’s expectations. The earnings and revenue beat is a positive sign to shareholders who seek improvements out of the company. Consumers are always looking for new forms of entertainment, through its product offerings, Electronic Arts is able to provide valuable experiences worldwide.

T = Technicals on the Stock Chart are Strong

Electronic Arts stock has seen a consistent uptrend in the last few months. The stock is now trading at highs for the year but is bumping-up against a long-term selling zone where it may spend some time. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Electronic Arts is trading above its rising key averages which signal neutral to bullish price action in the near-term.

EA

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Electronic Arts options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Electronic Arts Options

31.27%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Electronic Arts’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Electronic Arts look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-2.44%

-7.89%

75.81%

-17.48%

Revenue Growth (Y-O-Y)

-48.17%

-11.62%

-13.10%

-0.56%

Earnings Reaction

7.37%*

17.11%

4.31%

9.15%

Electronic Arts has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been optimistic about Electronic Arts’s recent earnings announcements.

* As of this writing

P = Excellent Relative Performance Versus Peers and Sector

How has Electronic Arts stock done relative to its peers, Activision Blizzard (NASDAQ:ATVI), Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), and sector?

Electronic Arts

Activision Blizzard

Facebook

Apple

Sector

Year-to-Date Return

78.24%

44.16%

-1.31%

-17.03%

24.85%

Electronic Arts has been a relative performance leader, year-to-date.

Conclusion

Electronic Arts provides gaming experiences that have sat very well with consumers worldwide. A recent positive earnings report has investors in the company happy. The stock has been steadily rising and is now trading at highs for the year. Over the last four quarters, investors in the company have been optimistic, although, earnings and revenue figures have decreased. Relative to its peers and sector, Electronic Arts is a year-to-date performance leader. Look for Electronic Arts to continue to OUTPERFORM.

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