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Gamers Unite! (In the Markets and Option Pits Anyway ...)

Video game companies Electronic Arts (EA), Zynga (ZNGA), GameStop (GME), and Take-Two (TTWO) become hot commodities for traders

by 2/8/2013 5:00:11 PM
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Now that the Super Bowl is over, there's another month until March Madness and another few months until the NBA Playoffs and Major League Baseball's Opening Day, we competition junkies need something to keep us occupied. Maybe that's why the videogame sector got so much attention this week. There were some major title releases, a missed deadline, and even a better-than-expected performance from a company many had written off as dead. So in light of my attempts to finally finish the latest edition of Master Chief's Halo 4 space saga this weekend (check out Conan O'Brian trying to review the game here), here's a look at the big names and news in the industry this week:

  • California-based Electronic Arts Inc. (NASDAQ: EA - 17.37) has had a busy few weeks, releasing the latest edition of its popular Dead Space series a few days ago and disclosing its December 2012 quarterly results last week. The earnings were a bit of a downer, as the company reported dropping revenue in the key holiday period and cut its 2013 outlook guidance to between 86 cents and $1.00 per share. The stock took an immediate hit, but this week's release of the new game helped perk investors back up. And as colleague Terri Stridsberg wrote this week, bullish option traders came out in droves to join in the fun. If Dead Space exceeds expectations and sales pick back up overall, EA might also be a candidate for a short-squeeze rally. Short interest accounts for 8.7% of the total float on the equity, and it would take short investors more than six trading days (at the stock's current volume) to buy back all their shares if they wanted to cover their positions. And with 14 of the 20 analysts covering EA sitting on the fence with a "hold" rating, any move in the positive direction could also force short-sellers to exit, thereby pushing up the stock even further. And despite the disappointing earnings and outlook, EA is still outperforming the S&P 500 Index (SPX) by 18 percentage points over the last three months, and is still up more than 20% on the year. In addition, the 10- and 20-day moving averages that had previously acted as resistance to the stock are now helping support it. So there are definitely signs that the makers of the NFL Madden series can continue its comeback.

  • Zynga Inc (NASDAQ:ZNGA - 3.43) has a much different business model than other gaming contemporaries. Instead of relying on consoles such as Microsoft Corporation's (NASDAQ:MSFT) Xbox 360 or the Sony Corporation's (ADR) (NYSE:SNE) Playstation 3, Zynga's games are "social," and are usually played within the confines of social networks such as Facebook (NASDAQ:FB) -- (although they do have popular games for smart phones that can be addictive, such as Words With Friends, as Alec Baldwin found out). Anyway, ZNGA had been written up for dead until this week's surprise earnings report and actual profit for the December 2012 quarter. That news immediately led to several analyst upgrades and more action in the option pits, as noted by colleague Beth Gaston. The stock responded, and is up more than 45% in 2013 and is beating the SPX by 21 percentage points over the last 20 trading days. But option trader sentiment is mixed on the stock. The Schaeffer's put/call open interest ratio (SOIR) for ZNGA stands at 0.64, a relatively low number until you consider that current levels are higher than all but 24% of similar readings taken in the last 12 months. In other words, traders have rarely been so inclined toward the put side. On the other hand, the equity's International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) 50-day call/put volume ratio stands at 6.41, meaning investors are buying to open more than six times as many calls than puts. That level also is just 8 percentage points from an annual high -- meaning investors have rarely been so optimistic.

  • Now as for where and how you buy the games, GameStop Corp. (NYSE: GME - 26.06) has also been on a run lately, as noted by colleague Andrea Kramer. While the retail chain doesn't actually make games, GME can make or break them. It participates in major releases, even offering users access to exclusive content if they buy the game through GME outlets. The stock is little changed year to date, blunting a rally that saw it climb nearly 70% since hitting its 12-month low of $15.32 in early August. But option traders haven't seemed to think much of GME's prospects recently. GME's SOIR stands at 1.35, meaning put open interest handily outweighs call open interest among options with under three months until expiration. The stock's SOIR has been higher just 21% of the time during the last 12 months. And the equity's ISE/CBOE/PHLX 50-day put/call volume ratio is at 1.12, higher than just all but 79% of similar readings over the past year. In other words, option traders have rarely been so put-heavy on GME during the last 12 months.

  • But the gaming industry can be cruel -- one missed deadline can make or break a company. Take Take-Two Interactive Software, Inc. (NASDAQ:TTWO 15.04), for example. The New York-based developer announced yet another delay and missed deadline for the latest edition in its flagship Grand Theft Auto series last week, and the bears were immediately on the hunt. As noted by colleague Andrea Kramer last week, short-term bears immediately targeted more short-term drops following the announcement. The stock suffered a slight pullback on the news, but that didn't derail a potential comeback story. While down more than 8% year-over-year, TTWO shares have nearly doubled since hitting their 12-month low of $7.37 on Aug. 2, and are up more than 35% year to date. Yet option traders still aren't sold. The stock's SOIR stands at 0.74, but more importantly, that ranks in the 71st percentile of all similar readings over the last 12 months, meaning traders are more pessimistic than usual. In addition, the equity's ISE/CBOE/PHLX 10-day put/call volume ratio is at 0.93, in the 92nd percentile, and the 50-day put/call volume ratio on the same exchanges is at 0.53, with only 1% of readings higher during the past year. Both those indicate a seriously bearish attitude toward TTWO, despite the recent technical run.
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