Stock Of The Day: EA's Selloff May Open Doors For Long-Term Rebound

Electronic Arts Inc. EA is seeing relatively quiet trading on Friday following a sharp selloff triggered by a downward revision in its Q3 revenue guidance.

The gaming giant slashed its revenue forecast to $1.883 billion from the previous estimate of $2.507 billion, according to Benzinga Pro, while maintaining its earnings outlook at $1.11 per share.

The selloff may have been an overreaction.

If sales drop but earnings don't, it could be a sign that the company is becoming more efficient. This is one of the reasons why Electronic Arts is Benzinga’s Stock of the Day.

Operating Margin is a metric that shows how efficient a company is. For example, if the margin is 2%, for every dollar of sales there is a 2 cent profit. If the margin is 5%, for every dollar of sales there is a 5 cent profit and so on.

If sales are decreasing but earnings are the same, the operating margin will increase. It could mean the company is becoming more efficient. This might be bullish for the long term.

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There may also have been a possible capitulation in Electronic Arts. As you can see on the chart, a huge amount of volume traded after the company announced the news.

This could mean the sellers have thrown in the towel. Traders and investors who wanted to sell got sick of watching the price drop and decided to sell their shares regardless of the price. This resulted in a massive spike in volume.

If the news isn't as bad as it first appeared and buyers enter the market, they will have difficulty finding someone to purchase the shares from. They will need to outbid others who wish to buy and pay premiums.

This could force the stock into an uptrend.

Electronic Arts also found support at a price that had been support before. Some of the traders and investors who sold shares around current levels in September 2023 vowed to repurchase them after the price rallied, assuming they could buy them for the same price they were sold for.

Now that the stock has fallen back to the level, they are placing buy orders. These orders have created support and put a floor under the price.

The stage may be set for Electronic Arts to move higher.

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