Electronic Arts Is Off Its Game

by David Gibbs

Serial over-promiser Electronic Arts (ERTS) may have under-delivered for the last time when it reported earnings for the December quarter Monday after the bell. The company reported non-GAAP EPS of $0.33, beating consensus estimates of $0.31, but the real story behind the earnings release was the company’s guidance for the coming quarter, as well as the coming year.

For the March quarter, one which should reflect the release of several big-name titles, the company forecasted non-GAAP earnings of $0.02 – $0.06 / share, well below analyst estimates of $0.13 / share. ”Given that they are releasing four triple-A titles in the quarter, including the fact that ‘Mass Effect 2′ could turn into one of the year’s biggest blockbusters, it’s a problem if they can’t make money on that,” remarked one analyst in response to the forecast.

For the next fiscal year, which ends in March 2011, management expects non-GAAP earnings of $0.50 – $0.70 / share on revenue of $3.65 – $3.9 billion. As was the case for the coming quarter, these estimates came in well below the Street consensus, which called for EPS of $0.74 on revenue of $4.07 billion.

Some suspect that the cautious guidance, which starkly contrasts the brazen forecasts that the company was known for, may be little more than a shift in management thought. They surmise that management is merely trying to put themselves in a position to under-promise and over-deliver next time around. This may be the case, but we won’t know the answer until numbers for the March quarter are released. Until then, all there is to know is that shares are getting hammered on Monday’s news.

ERTS finished up the after-hours session trading at $16.04, good for an 8.29% decline. This puts shares dangerously close to their 10-month lows of $15.86, which they hit on December 9th. Since then, shares moved as high as $18.87 before leveling out at $17.49 leading into Monday’s report. Considering shares are less than $0.20 from their lows, I would definitely be on the lookout for a big shakeout Tuesday. One a positive note, if we do see significant selling on heavy volume, that may help to create a capitulation bottom for ERTS, and maybe even a buying opportunity.

Be warned though. Trying to pick a bottom in stock selling off in a correcting market is a dangerous game and I wouldn’t recommend it. Stay away from ERTS unless you’re feeling lucky, real lucky.

Disclosure: No Holdings In ERTS.