Game consoles appear to be one section of the market where growth is continuing and piper Jaffray said last week the outlook is strong.
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EA - Electronic Arts - Company Description
Electronic Arts develops, markets and distributes game software for online games, game consoles, internet connected devices, PCs, mobile phones and tablets worldwide.
Some of their major game brands are Madden NFL, The Sims, Battlefield, Dragon Age and Plants vs Zombies. In Q4 the company sold more than 13 million copies of Star Wars: Battlefront. That quantity was three months ahead of what they anticipated.
Piper Jaffray said last week that the current generation of game consoles has a long way to go to catch up with the prior generation. They view that as a positive for EA.
The current console cycle is in its third year and Piper said the uptake rate has been 40% to 50% faster than in prior cycles. However, only about 40% as many Xbox One and PS4 consoles have been shipped as the prior generation of Xbox 360 and PS3s. Sales of the older models reached 162 million units and the current generation has only sold about 60 million. Considering the newer versions have many more features the analyst believes the trade up rate will continue to grow for several years. At the end of 2015 EA had 8,400 employees.
The analyst also believes the shift towards digital delivery will also drive margins higher. Piper has an $87 price target on EA.
At the end of January EA reported earnings that beat estimates but revenue of $1.8 billion narrowly missed estimates for $1.81 billion. They raised their full year guidance to $4.52 billion and $3.04 per share. Analysts were expecting $3.10 and $4.56 billion. EA has a history of issuing very conservative guidance. They also said because they sold so many of the star Wars game in Q4 that sales estimates for Q1 were lower. Shares crashed on the news from $71 to $53. Shares rebounded quickly from that crash and closed at $64 on Monday.
Last week EA announced the sale of $600 million in notes and a $500 million stock buyback program that will be completed by the end of May. Rarely do companies announce buyback programs with only a 90-day window. This should continue to lift the shares in the weeks ahead.
EA will present at the Morgan Stanley Media conference at 6:25 PM ET on Tuesday.
I believe EA shares will recapture that $70 level if the market cooperates. I am recommending a short term April $67.50 call, currently $1.62. If the current rebound fades we will not have much at risk.
I am using an entry trigger just in case the afternoon fade today was the start of something bigger. The entry point will be $65.45 and just over the intraday high at $65.25.
Earnings may 5th.
With EA trade at $65.45
Buy April $67.50 call, currently $1.62, no initial stop loss.
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