So if you are like me, and your iTunes App store account has been hijacked by your tween or teenage kids, then you a Pokemon Go App showed up on your iPhone a few weeks ago. You probably ignored it until some nerd bumped into you on the street, face in their phone and jumping for joy for some odd reason. And of course the media wouldn’t shut up about it.
Because of all of this, Nintendo’s (owner of Pokemon, but not the game) shares doubled in Japan. It’s been a full on Mania. In less than a month, Pokemon Go has passed a massive milestone:
— TechCrunch (@TechCrunch) August 1, 2016
You may be asking, what’s the difference between this and Farmville, the dumb game everyone was playing through Facebook back in 2010?
Farmville was addicting, like Pokemon Go. But what’s different this time is that unlike like Farmville, Pokemon Go is the start of a trend of mobile augmented reality games. It may be a fad, but it’s the first game in what will become a much bigger segment in gaming.
At its height in 2012, Zynga (ZNGA) the owner of Farmville booked $1.2 billion in revenues. Those sales came at the expense of some other gaming companies sales, or at least their growth. In 2012 Electronic Arts (EA) which dominates with console games, likely felt the heat as smartphone growth exploded in 2011/12, and in the year that ZNGA saw sales go from $1.14 billion in 2011 to $1.28 billion in 2012, EA saw their sales decline 11% from $4.2 billion to $3.73 billion. The point here is simple, EA’s best selling titles are Star Wars Battlefront, war games Battlefield and sports. All of these sorts of games lend themselves to augmented reality versions for peeps to play mutli-player as they do now, but on MOBILE. The shift away from consoles, towards mobile is one where there will be multiple players, and those who are going deep (as we speak) with AR and VR may do some damage to game sellers who are still married to consoles. I am not sure there is anything to do at the moment, but worth noting that Pokemon Go is likely the first pitch of the first inning of a game that will go extra innings.
Event: EA’s commentary tonight on their fiscal Q1 earnings call will be interesting. Especially if they even acknowledge the mobile gaming craze that just started.
The options market is implying about a 5.5% one day move following the results, which is shy of the 4 qtr one day average move of about 6.9% and below the 10 day average of 7%.
EA is a fairly reasonably priced stock given its growth, trading 21.2x expected fiscal 2017 eps growth of 14%.
EA is up nearly 11% on the year, and just 5% from its all time high made on July 12th at $80. The stock’s pull back brings it very near the breakout level following their fiscal Q4 results in May. The gap level at $70 should serve as decent near term technical support, while $60 is the level on a sustained move lower. $80 is obvious near term technical resistance, but uncharted territory above:[caption id="attachment_65464" align="aligncenter" width="600"] EA 1yr chart from Bloomberg[/caption]
Unusual Pre-Earnings Options Activity: There were two large trades in the options market in gaming stocks that caught my eye.
First in EA, when the stock was trading $76 just after noon, it appears a trader bought to open 10,000 Aug 12th weekly (next week) 76 calls for $2.39, or $2.39 million in premium and sold to open 20,000 Aug 5th weekly (this week) at 63 cents each, or $1.26 million in premium. This is a slightly confusing trade, but plain and simple it is bullish. The trader not only has exposure on the downside to the $1.13 million in premium if the stock is below $76 on next Friday’s close. But also because the trader sold 2x as many Aug 5th weekly 80 calls, if the the stock was above $84 on this Friday’s close, up 10.5% from current levels, the trader would suffer losses. Which leads me to believe that this trade was done against 1 million shares of stock in an effort to leverage an existing long position.
And the other trade came in EA competitor Activision Blizzard (ATVI), also shortly after noon. When the stock was $39.60 a trader bought to open 10,000 Aug 12th weekly 40.50 calls for $1.12, or $1.12 million in premium, and sold to open 20,000 Aug 12th weekly 42.50 calls at 44 cents each or $880,000, resulting in a net debit of $240,000. As ATVI is scheduled to report Q2 results on Aug 4th, I suspect this is also a trade that leverages an existing 1 million share position.
My VIEW: Frankly I don’t have an opinion on either stock into earnings, especially so close to the recent all time highs. The options activity, while apparently bullish does little to affect my view one way or the other. But what I am most interested in is to see if either or both management address the mania that is Pokemon Go, how it may be affecting current sales, and how they view and plan to compete in AR & VR games longer term.