Is Electronic Arts a Clear Case of Institutional Manipulation?

It came as no huge surprise that Electronic Arts (ERTS) reported a very rough third quarter, as they had warned of a tough holiday season and analysts have lowered estimates 4 times in the last month according to Yahoo! finance. However, the actual results were worse than even the most pessimistic of analysts estimates, as the company reported a net loss of $641 million or $2.00 per share. Much of the loss can be attributed to an ongoing restructuring effort at the company.

In addition, the company affirmed that they will be cutting 1100 jobs and closing 12 factories, as well as narrowing its product offering. Not including these restructuring charges, the company earned 56 cents per share compared to consensus estimates of 88 cents. Even the most bearish of estimates called for 67 cents; apparently EA’s warnings were not stern enough.

So, after the stock rose more than 4% during regular trading prior to reporting, one would expect to see EA take a serious haircut after hours. However, the reality is far different, as more than an hour after the company reported shares are up more than 6%. I began to search for something to cause this optimism; was it revenue? Nope, it missed by nearly 15%. Was it an positive outlook going forward? Quite the opposite, as the company slashed its earnings guidance for the next quarter to a loss of 35 cents per share. The company had already lowered fiscal 2009 guidance to $1 EPS from $1.40. The company’s 3Q results seem to fly directly in the face of the idea that the video game industry is particularly recession resistant.

When a stock's price movement simply does not mesh with the underlying company’s performance, there is one prime suspect - manipulation by the large institutional investors. The percentage of shares held by institutions is 85% and the percentage of float held by institutions is 97%, again data according to Yahoo! finance. We wish we could say that the upward price movement is because the bad news had already been priced in, but it is hard to make that argument because the results were worse than even expected. So, what does this mean? Be prepared for a serious sell off in Wednesday morning trading as this movement is simply unfounded. Ockham has placed a Greatly Undervalued valuation on Electronic Arts as they are best of breed and undervalued compared to historical norms, but at this point buyer beware, because it could get ugly as institutions may begin dumping some shares.

Comments

[mrottersman:]

"Best of breed"?--I hope that's a joke. ATVI is superior in every regard. If you don't believe me, tune in to their earnings report on 2/11.

Feb 03 08:17 PM

[Asif Suria:]

After hour activity can be all over the place and is often an unreliable indicator of how investors during the regular session are going to perceive the earnings announcement.

I agree with the poster above that Activision is currently best of breed, especially after its merger with Blizzard as discussed in the following article,

seekingalpha.com/artic...

Feb 03 08:23 PM

[Moon Kil Woong:]

Anytime there is low volume it may be just a few market participants. Even so, it's hard to determine it as manipulation and usually manipulation falls on very small companies and at the end of a quarter. We call this window dressing to make a stock look better for people before they have to report the value of their funds or holdings.

Another argument might be this. Some investors get super happy seeing companies fire their employees if the revenue source is pretty stable. There are numerous cases where stocks rise after declaring layoffs. I don't know about ERTS but this may be the case. Some investors use very grim methodologies.

Feb 03 09:29 PM

[Adam Sharp:]

I've seen the same thing lately. Horrible misses are being casually shrugged off, "at least they still in business. that good."

I don't know enough about ERTS to comment on it. But lately everyone seems to be "selling the news"(or vice-versa) and trying to be as contrarian as possible. Horrific results that are worse than expected = BUY!

Maybe it's manipulation, maybe it's false contrarianism, maybe people figure the sector is due for a bailout. Video game industry up next?

Feb 03 09:33 PM

[Jase:]

What nonsense. This is a short candidate on its next breach of $18 to $19. Next stop: below $9. Technically broken. Sound dramatic? Check in with me in a few months.

Feb 03 10:54 PM

[Egg:]

You're thinking one dimensionally in expecting ERTS to be down with the horrible news.

The stock is down from near 50 to 15. That's 70% down in preparation for this warning (and the upcoming recession.) So it's very possible that people are willing to place money in ERTS at this price in expectation of things improving next year (or at least not as bad as warning.)

Now if the recession turns into a depression then, of course, ERTS will suffer alongside the rest. But for now, don't just expect them to be down solely due to the warning. Remember, WallStreet is forward thinking.

Feb 03 11:33 PM

[momomiester:]

You got to be kidding! Erts was 50 months ago and when earnings hit was in the teens. It gets to a point where people say...."You know..I am done selling, eventually the economy will come back" so you get the washed out action. When it was obvious it wasn't selling the shorts covered. I wouldn't call it manipulation cause it would require collusion among participants.

Feb 10 10:50 AM

[momomiester:]

k

Feb 10 10:52 AM