Electronic Arts - When Laggards Give Surprises

In the past few weeks, we saw how high flyers like Coinstar CSTR, Cree CREE, and F5 Networks FFIV getting 20-25% downside punishment after earnings reports when they reported disappointment in earnings or revenues, or guidance. Once these stocks dropped, they languished even when the stock market was roaring higher. Other than these high flyers, stocks like Best Buy BBY and Nike NKE behaved the same way after their disappointing earnings reports, even though their drops were not as dramatic. On the flip side, stocks that have been languishing and near their 52 wks low can produce some wonderful pops if they can give positive surprises for the market. A good example for this is Electronic Arts ERTS, the video game company with the Madden NFL franchise and numerous other games such as SIMS, NBA Live, Rock Band, etc. As we all know now, gaming growth has been migrating from console games to online, social media, and mobile games, areas where Electronic Arts were not very well established. It also didn't help that the company had been pushed around by Nintendo, Activision Blizzard ATVI, CAPCOM, etc. for competition in top selling video game titles for quite some time now. As a result, its stock has been trading in the teens for more than a year now, comparing to its trading price of > $50/share in 2008. Electronic Arts reported earnings on Feb 1, Tue, after market closed. It reported $0.59 earnings per share, with expectation around $0.57/share. Its Non-GAAP revenue was $1.41 billion vs expectation of $1.43 billion. Therefore, while it beat on earnings, revenue was a little short. However, it showed good increase in games distributed digitally, a 39% increase in the last quarter when comparing with the same period a year earlier. Nonetheless, the biggest surprise came when it also announced buyback of $600 million of outstanding shares, nearly 12% of its total, over the next 18 months. With this not-so-shabby result, and the surprising size of stock buybacks, Electronic arts rose > 10% after hours. When investing in laggards for earnings surprises, investors have to be very careful. There are very good reasons why laggards are laggards, and one only needs to look at the share price of Eastman Kodak EK after reporting disappointing results a week ago. If the intention is to bet for a pop, investors should seriously consider buying call options, or use married-option strategy to hedge the risk.