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Electronic Arts (EA) Q3 Earnings: Will it Surprise?

Zacks Equity Research

Electronic Arts Inc. EA is set to report third-quarter fiscal 2016 results on Jan 28. In the previous quarter, the company reported a positive earnings surprise of 57.58%. On an average, EA has delivered a positive earnings surprise of 74.54% in the last four quarters.

Factors at Play

We believe that EA’s strong games portfolio, strength in new consoles and continuing growth in the mobile market are key growth catalysts. Moreover, strong growth in digital sales coupled with cost optimization initiatives will be beneficial going forward.

The company is likely to benefit from the launch of Star Wars Battlefront and Madden NFL 16. As per an NPD report, while Madden finished at number 2, Star Wars Battlefront broke into the 2015 top 10 selling games list at number 4. Prior to the title release, Electronic Arts stated that it expects to sell 13 million copies of Battlefront by Mar 2016, up from the earlier projection of 9 to 10 million units. Despite mixed reviews, analysts are confident that Battlefront will sell over 13 million copies, given the seasonal impact of the holiday season and the stupedous success of  Star Wars: The Force Awaknens.

However, the company faces a number of headwinds that include significant competition from other game makers such as Activision ATVI, Glu Mobile Inc. GLUU and others. Additionally, higher consumer spending on new consoles may cannibalize software sales in the near term.

Earnings Whispers

Our proven model does not conclusively show that EA is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here as you will see below.

Zacks ESP: EA currently has an ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at $1.70 per share.

Zacks Rank:EA carries a Zacks Rank #2 (Buy), which increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stock to Consider

You may consider the following stock as our model shows that it has the right combination of elements to post an earnings beat this quarter.

MaxLinear, Inc. MXL has an Earnings ESP of +2.94% and a Zacks Rank #1 (Strong Buy).

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