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Electronic Arts


reports second-quarter results after the close Tuesday, many investors will be hoping for something bad.

It's not that they're shorting the stock -- it's that they're bullish on the video game publisher's long-term prospects and either want to add it to their portfolios or add more to their positions.

"I'd love to see a miss or

have them issue conservative guidance," says Matt Kelmon, president of the Kelmoore Strategy Eagle. Kelmon's fund already owns 200,000 shares of EA, but he'd like to buy more.

"In my mind, they're the best-positioned of all gaming companies. You've got to own it, but it is a very volatile stock."

The problem EA bulls face is that they're not alone. So many investors consider EA


company to own in the video game sector that whenever it sells off, it tends to bounce back fairly quickly.

That's why Kelmon and other analysts will be scrutinizing EA's report, hoping for news that might dampen broader investor enthusiasm for the company's shares, at least in the near term.

Among the possibilities that could weigh on the company's outlook and its stock price are increased development costs, delays of key titles and expectations about consumer adoption of new game systems.

But it may take a lot to shake investors' faith.

EA's earnings fell last fiscal year compared with the previous year on a mere 5% jump in sales, and the company expects earnings to fall again this year on another meager sales gain.

Reflecting disappointing results and guidance, the company's stock is off about 8% in the year to date.

But considering that EA's peers have posted more favorable results, its stock has held up better than might be expected -- EA's shares are actually up 27% over the last 12 months.

And despite the stock's decline this calendar year, EA's shares are still trading at about 30 times projected fiscal 2007 earnings, a premium not only to the broader market, but also to its game publishing rivals.

Investors have reason to be bullish on the stock. The company is the largest independent game publisher and it dominated this last console cycle.

With revenue about three times larger than those of its nearest competitors, a huge cash horde and some of the most high-profile intellectual property licenses -- the rights to make National Football League video games and titles based on the

Harry Potter

movies, for example -- many analysts see the company as being poised to continue and extend its lead on the next generation of consoles.

Plus, the way that EA accounts for expenses is different from that of most of the competition and serves to weigh on its near-term results. Most video game publishers capitalize their investments in game development, recognizing the expenses over the life of the game.

In contrast, EA expenses development costs in most cases well in advance of shipping the games.

That difference is important as publishers gear up for the next console cycle. With


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Xbox 360 slated for release later in November and





expected to release their own new devices next year, development costs have been rising.

Although those costs have hit EA's near-term results, they likely won't be as big a factor after the new consoles are launched. In comparison, thanks in part to their accounting practices, EA's rivals have been able to post better near-term results but could see bigger hits later in the console cycle, particularly if a game bombs.

"It's kind of hard to say that EA is trading at a huge premium because they are doing their expensing up front," says one fund manager who asked not to be named and who is long EA shares. "You can't compare them on an apples-to-apples basis."

Officially, however, analysts polled by Thomson First Call are expecting the company to post a profit of 4 cents a share for the just-completed quarter on $632 million in sales. The company, meanwhile, has forecast a break-even bottom line for the quarter -- or a profit of 5 cents a share, excluding certain charges -- on sales ranging from $600 million to $630 million.

But beyond the numbers, investors will be scrutinizing a host of details that could call future numbers into question.

One possible problem is the coming console transition. Although companies typically see expenses go up as they develop games for the new generation of consoles, those investments often take several years to pay off because the market for next-generation games is small immediately after the new systems are launched.

"I'd like to hear how they think they're going to manage that, and what their best guess is when those consoles will really be meaningful," says Steve Monticelli, president of Mosaic Investments. Monticelli's fund doesn't own EA, but he's bullish on the company's long-term prospects.

Playing into those expectations is Microsoft's

attempt last week to tamp down expectations for holiday shipments of the Xbox 360. Although the company expects to ship up to 5.5 million consoles in its current fiscal year, it says it will ship fewer consoles this holiday season than analysts were expecting.

Another potential trouble spot is game development delays. EA already

lowered expectations for this fiscal year after

pushing back the launch date of its upcoming game based on

The Godfather


Similarly, rival



last week effectively

lowered guidance for its fiscal fourth quarter because of the delay of two of its upcoming titles.

Should EA postpone

The Godfather

again or push back another key release, it might have to reduce guidance again, says the unnamed fund manager. "I'm keeping my fingers crossed that they don't slide more games out," he says.

Others, though, will be hoping for a buying opportunity.