Past Performance: Over the past four years Electronic Arts (EA) has only missed EPS expectations once, which was back in November of 2009. EPS was nearly cut in half from the fourth quarter in 2011 versus the fourth quarter of 2012. That is not an acceptable performance, especially during the holiday shopping season.
EA's stock has been on an absolute tear since January 9th of this year soaring from just $13.70 per share to current levels of approximately $19 per share. While I am not fond of using technicals to trade, the extremely overbought nature of EA is quite glaring. Technicals only tell you a little piece of the story though, the fundamentals make EA look even worse.
Fundamentals: Currently, EA trades with a P/E of 34.2, a forward P/E of 16.41, a P/S of 1.43, and a PEG of 1.52. In comparison, the consumer goods sector trades at a current P/E of 20.5 and a forward P/E of 19.4. The S&P 500 trades with a current P/E of 20.6 and a forward P/E of 17.5. The current valuation, current P/E, of Electronic Arts is higher than both the consumer goods sector average and the S&P 500 average.
Then take into account the forward looking metrics. The forward P/E for Electronic Arts is higher than the consumer goods sector, and only slightly less than the S&P 500 average. Combine the forward P/E with the P/S ratio and the PEG ratio, both of which are in overvalued territory, and the stock shows further signs of a pull back forthcoming.
The Story: Just announced after the closing bell on Monday was the announcement that EA's CEO is stepping down. On top of that announcement, EA also lowered guidance for the current quarter. Wall Street responded favorably to the news that CEO John Riccitiello was going to step down, as the street is hopeful the successor will be able to perform better than their predecessor.
Whomever the new CEO turns out to be, they have a massive undertaking on their hands. Electronic Arts has a solid foundation in the game console segment, but they need to expand further in to the mobile gaming industry. That will be the greatest opportunity for growth for EA, and the segment the new CEO should focus a great deal of attention towards.
How To Play It: Electronic Arts is going to need a CEO with a clearer vision for the future. EA no doubt needs a turnaround story quickly before they lose too much more market share. I would look to short this stock until the valuations come back in to line, meaning a P/E less than the S&P 500, a P/S less than one, and a PEG less than one. My 52-week price target: $11.04.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in EA over the next 72 hours.
Additional disclosure: Always consult with a registered financial professional before adding a position to your portfolio. Investing involves a significant risk of loss, as such never invest more than you can afford to lose.