Electronics Arts Stock at Risk for Bigger Losses After Earnings

EA has been selling off since breaching its 200-day trendline in early July

Jul 29, 2019 at 11:16 AM
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Electronic Arts Inc. (NASDAQ:EA) breached its 200-day moving average earlier this month, as concerns over the video game maker's "Apex Legends" update sent the shares spiraling 4.6%. EA stock has only extended this slide -- down 2% today at $87.76, after a price-target cut to $96 from $102 at MKM Partners -- and the options market is bracing for even more volatility after the company reports earnings tomorrow, July 30.

At last check, Trade-Alert put the implied earnings deviation for EA stock at 9.8% -- wider than the 5.2% next-day move the equity has averaged over the past eight quarters. Four of the eight post-earnings reactions have been negative, and only one has been large enough to match or exceed what the options market is expecting for Wednesday's trading (a 13.3% post-earnings plunge in February).

EA's options pits are relatively quiet ahead of earnings, with the 289,429 contracts currently making up open interest registering in the low 9th annual percentile. Calls have the slight edge over puts on an absolute basis, but not all of this action is necessarily bullish. Specifically, the August 145 call is home to peak front-month open interest, but data from the major options exchanges confirms mostly sell-to-open activity at this deep out-of-the-money strike.

Outside of the options pits, analysts are still mostly upbeat toward Electronic Arts, with 16 of 24 brokerages maintaining a "strong buy" rating on the stock. Plus, the average 12-month price target sits all the way up at $111.17. This puts the stock at risk for more bear notes, should earnings disappoint tomorrow evening.

EA shares could also see bigger headwinds should shorts continue to target the stock. Short interest rose 5.6% in the latest reporting period to 9.79 million shares. This represents just 3.3% of the equity's available float, though, meaning the bearish bandwagon is far from full.

ea stock daily price chart on july 29


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