Will Shares of Electronic Arts Benefit from a New CEO?

With shares of Electronic Arts (NYSE:EA) trading around $26, 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 that include popular platforms like PCs, Apple Mac, Apple iPhone, Google Android, Apple iPad, Amazon Kindle, and Facebook.

Electronic Arts has chosen head of EA Sports Andrew Wilson to replace John Riccitiello as CEO. The company has struggled as traditional video games lose market share to cheap gaming apps made for mobile devices. EA has cut costs and released new titles in an attempt to stay relevant but has still struggled, along with the rest of the gaming industry. According to a report from The Wall Street Journal, Wilson was chosen because he has been with Electronic Arts for 13 years and has admirable creativity and business skills.

T = Technicals on the Stock Chart Are Strong

Electronic Arts stock been exploding over the past several years. The stock is currently trading near prices not seen for almost five years. 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 signals neutral to bullish price action in the near term.

EA

Source: Thinkorswim

Taking a look at the implied volatility 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

35.24%

76%

75%

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

Put IV Skew

Call IV Skew

October Options

Flat

Average

November Options

Flat

Average

As of Wednesday, there is 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 significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

E = Earnings Are Mixed 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

12.70%

-9.45%

75.81%

-17.48%

Revenue Growth (Y-O-Y)

-0.63%

-11.62%

-13.10%

-0.56%

Earnings Reaction

6.67%

17.11%

4.31%

9.15%

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

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), and Apple (NASDAQ:AAPL) — and sector?

Electronic Arts

Activision Blizzard

Facebook

Apple

Sector

Year-to-Date Return

84.37%

60.64%

70.48%

-12.80%

50.83%

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. The company is reportedly replacing its CEO in order to hopefully better the game developer. The stock has been exploding in recent years and is now trading at prices not seen for five years. Over the last four quarters, earnings have been mixed while revenues have been decreasing. However, investors have been excited about what they have heard during earnings announcements. Relative to its peers and sector, Electronic Arts has been year-to-date performance leader. Look for Electronic Arts to continue to OUTPERFORM.

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