It's time to play.

Every week, I offer up a stock that I think is going to disappoint investors. I'm an optimist at heart, so it wouldn't be right if I just ripped into a company without thinking it through. My exit strategy is simple. I come right back and suggest three stocks that I think should replace the stock I'm dissing.

Who gets tossed out this week? Come on down, Electronic Arts (NASDAQ:ERTS).

It's not in the game
I go way back with EA. One of the first computer games I remember playing was EA's One on One, a rudimentary basketball game where Larry Bird and Dr. J played hoops. I also managed an Earl Weaver Baseball league in my neighborhood, before rotisserie baseball exploded on the scene.

This naturally leads me to yesterday's retirement of coaching and broadcasting great John Madden. One of EA's "can't miss" properties is the Madden football franchise, where gridiron buffs pay up for the annual installments to make sure they are current with the latest players and gameplay features.

Madden's retirement may not seem like a big deal. The franchise is on autopilot. EA has exclusive rights with the NFL, so it's not as if a rival studio can jump right in. However, how out of place did I sound two paragraphs ago when I was talking about Earl Weaver and Dr. J? In a couple of years, young gamers may not even know who Madden was. If you doubt me, run "Frank Gifford NFL 2010" by a young teen.

Obviously there is more to EA than Madden, but it's clear that the company isn't the gaming giant it used to be. When is the last time you saw the market get excited about The Sims? Spore didn't exactly live up to the hype, did it? EA may be holding up better with Rock Band, FIFA 09, and Warhammer Online, but is it enough?

You don't have to take my anecdotal word for it. The company realizes that it is less relevant. It announced layoffs in February. Profitability has been whacked hard through the first three quarters of fiscal 2009. Operating cash flow in calendar 2008 was $82 million, a far cry from 2007's $267 million.

The future isn't going to get any brighter. Industry watcher NPD Group announced yesterday that video game hardware and software sales fell by 18% and 17%, respectively, in March. That's not going to change now that companies like Amazon.com (NASDAQ:AMZN) are jumping into the used-game resale market.

EA began fiscal 2010 this month; analysts see it posting a profit of $0.94 a share. That would reverse the expected loss of fiscal 2009, but fall short of the $1.06 it earned in fiscal 2008.

Given EA's lumpy financials, fading operating cash flow (that peaked three years ago), and plentiful yet diminishing cash levels, it's hard to justify paying a market premium for EA today.

Good news
As I have every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over three fill-ins.

  • Activision Blizzard (NASDAQ:ATVI) - EA's barren bag of tricks is a joke compared to Activision's Guitar Hero, Call of Duty, and World of Warcraft franchises. Unlike the gloom and doom at EA, Activision Blizzard surprised investors yesterday by announcing that it would exceed its original guidance for the otherwise moribund March-ended quarter. Analysts see earnings growing to $0.63 a share this year and $0.73 a share come next year. So why pay 20 times fiscal 2010 earnings for EA when you can pay just 14 times 2010 earnings for the smoother market leader?
  • NetEase.com (NASDAQ:NTES) - EA doesn't even know how to pick its horses overseas. It purchased a 15% stake in The9 (NASDAQ:NCTY) two years ago, the same company that is now trading in the single digits after losing its World of Warcraft license in China to NetEase this week. Yes, NetEase is another company that is projected to grow its earnings this year, yet trades at a lower forward multiple than EA.
  • Take-Two Interactive (NASDAQ:TTWO) - After failing to buy Take-Two for roughly $26 a share last year, EA investors may feel as if they skirted disaster. Take-Two had a huge hit with Grand Theft Auto IV last spring, but the tail has been short. It is back to posting dreadful quarterly financials, and despite an intriguing portfolio and pipeline, it is still perceived as a one-trick pony. Well, it's a heck of a trick. GTA4 is so powerful that Microsoft (NASDAQ:MSFT) is shelling out $50 million for a pair of exclusive episodic installments through its Xbox Live marketplace. Wall Street sees earnings bouncing back in fiscal 2010, pricing Take-Two at half of EA's multiple. It's your loss, EA.

Other Foolishness:

NetEase.com and Take-Two Interactive Software are Motley Fool Rule Breakers selections. Activision Blizzard, Amazon.com, and Electronic Arts are Motley Fool Stock Advisor picks. Microsoft is a Motley Fool Inside Value selection. Try any of these Foolish newsletters today, free for 30 days, and see how they can help you plump up your portfolio.

Longtime Fool contributor Rick Munarriz still finds himself picking up the annual installments of Madden, although he finds that he rarely plays through an entire season anymore. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.