Electronic Arts (EA) – It’s In the M&A Game?

by Dan May 8, 2019 4:24 pm • Trade Ideas

Last night Electronic Arts (EA) reported fiscal Q4 earnings causing a surge of nearly 7.5% on the opening this morning before the optimist waned and actually caused the stock to go down the day before stabilizing in the late afternoon:


After a series of disappoints over the last few quarters, upside guidance and bullish commentary was only enough to push the stock up 1.24% (yuck), per Barron’sOnline:

While investors appear less than confident in the outlook, the stock is well off of its 52-week and multi-year lows from late December, and at least on the open was threatening a technical resistance level that dates back to late 2017:

Shares of EA trade at about 20x expected fiscal 2020 eps growth of 8% on 5% sales growth, kind of a fat PE/G, but the company has a killer balance sheet with $4.5 billion in net cash on a $28 billion market cap. This company is either activist or takeover bait in my opinion, and if I were an acquirer of content, this company at 4.4x sales ex-cash looks very attractive.

So what’s the trade? with all that said, the stock’s reaction today to supposedly good news is a little disconcerting and might need some time to digest in what is proving to be some new-found volatility in the stock market. If I were inclined to make a bullish bet looking out a few months I might look to sell some short-dated call premium to help finance some longer dated calls to let the trade play out over time.

Bullish Trade Idea: EA ($93.88) Buy June – Sept 100 Call Calendar for $3.70

-Sell to open 1 June 100 call at $2

-Buy to open 1 Sept 100 call for $5.70

Break-even on June expiration:

This trade performs best with a gradual move towards the 100 strike over the five weeks into June expiration. If the stock is below 100 June expiration the short 100 call will expire worthless and the trade will be left naked long the Sept 100 call. If the stock is close to 100 then the Sept 100 call should have appreciated as it will have picked up deltas. At that point it might make sense to further reduce the premium at risk by selling a higher strike call in Sept turning the trade into a vertical call spread. The max risk f this trade is the $3.70 premium paid, and would be at risk with a large move below the current level, or well above the 100 strike.