Electronic Arts: Searching for a Bottom

| About: Electronic Arts (EA)

In after hours-trading Electronic Arts (ERTS) fell over 8% on news that the company had lower sales, wider annual loss and had to reduce full year guidance. According to Yahoo!Finance, ERTS develops, markets, publishes, and distributes video game software and content.

This is the perfect example of a company that was thought to have it all and possibly be recession-proof. After all, 13-34 year old males were going to buy and play video games regardless of the economic environment. ERTS' stock price and company earnings, like much of the "conventional" wisdom the exists about the markets, proved to defy much of the logic.

Personally, I don't track earnings estimates since the concept of earnings is more or less an accounting interpretation that conveniently fits a corporate strategy to show profits or losses as needed. The concept of estimates of future expectations tied to the idea of earnings is a kind of mental gymnastics that I don't have the patience for. However, as part of the New Low Observer team, it is my primary responsibility to track Nasdaq 100 companies that have compelling price action at, or near, a new low.

ERTS last appeared on the New Low observer on December 11, 2009. At the time, ERTS was within 13% of the new low after falling from the lofty levels of $61 in 2007. After being on our Nasdaq 100 Watch List for only a couple of weeks, ERTS rose 15.82% in 26 days.

ERTS hasn't had luck recovering from its market doldrums. However, for astute market participants with a penchant for speculation, this stock may provide exceptional opportunities. When ERTS hit the ultimate low of $14.24 (March 9, 2009) it was in the throes of a market meltdown. In this instance (March 2009 low), we could chalk up the stock price performance primarily to the "adverse" conditions of the market. This means that the price action didn't reflect the truly dire conditions of the company specifically.

Now, as we see the stock getting pummeled in after-hours, we can find comfort in knowing that investors have had the opportunity to better gauge the conditions of the company and are about to price in the worst that is yet to come. One matter that is tremendously bothersome to me regarding the situation at ERTS is that the company is trying to bury the bad news with a flood of press releases. This annoys me to no end and indicates that the company has more to hide than reveal in the latest earnings report.

Although ERTS is in free fall mode, I recommend that potential speculators jump on the best information resources at your disposal (Value Line, Morningstar and Mergent's etc.) and verify whether or not this company truly has a viable business model. My suspicion is that ERTS is an opportunity that is waiting to be capitalized upon after considerable assessment of risk tolerance and due diligence has been done. Be mindful of the prospect that this company could test the long term support level of $10. Only put money that you're willing to lose towards this "special" situation.

Full Disclosure: No Positions

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