ATVI: Activision vs. Electronic Arts: Which Stock is a Better Buy?

Activision Blizzard, Inc. (ATVI) and Electronic Arts Inc. (EA), two of the world’s top video gaming companies, has been thriving amid the pandemic because of the appropriateness of their offerings to facilitate the “new normal” way of living.

Both the stocks generated decent returns over the past five years. While ATVI returned 113.5% over this period, EA gained 74.4%. In terms of year-to-date performance, ATVI is a clear winner with 29.8% returns versus EA’s 10.3%. But which of these stocks is a better pick now? Let’s find out.

Business Structure and Latest Movements

ATVI is an interactive entertainment company that develops and distributes content on video game consoles, PCs, and mobile devices worldwide through retail and digital channels. As one of the most popular gaming platforms worldwide, ATVI had a monthly active user base of 390 million as of September 30, 2020.

The stock has been largely benefitting from boosted audiences in its Call of Duty and World of Warcraft franchises. ATVI has recently announced the worldwide launch of the highly-anticipated Call of Duty: Black Ops Cold War, an all-new entry in the #1 selling series in Call of Duty and a direct sequel to the fan favorite Call of Duty: Black Ops. The company anticipates a bright fourth quarter on the way and projects a $2 billion holiday quarter ahead.

EA is another global leader in digital interactive entertainment. The company develops and delivers games, content and online services for Internet-connected consoles, mobile devices and PCs, across various genres. EA Play now has more than 6.5 million paid subscribers as of September 30, 2020.

In the current fiscal year, EA has launched more than 125 games and content packs on the Steam platform. The company launched EA SPORTS UFC 4, Madden NFL 21, Rocket Arena, and Star Wars: Squadrons during the last reported quarter. EA has recently announced a multi-year renewal of its partnership with UFC, and the National Hockey League, and the NHL Players Association.

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Recent Financial Results

For the third quarter ended September 30, 2020, ATVI’s net revenues climbed 52.4% year-over-year to $1.95 billion. Revenues from digital channels were $1.75 billion, as compared to $1.01 billion in the year-ago quarter. Non-GAAP EPS came in at $0.88, surging 131.6% year-over-year.

ATVI exceeded its third-quarter outlook, with strong execution across three strategic growth drivers – audience reach, engagement, and player investment. The company reported an operating margin of 40%. Net bookings came in at $1.77 billion, as compared to the year-ago value of $1.21 billion.

EA’s revenue for its fiscal second quarter ended September 2020 declined 34% year-over-year to $1.15 billion, due to a 51% fall in the Full game segment. Revenue from the Live services segment grew 13.2% year-over-year. The company reported net bookings for the trailing twelve months as $5.58 billion, growing 8% year-over-year. EPS for the quarter came in at $0.63.

Here ATVI is in an advantageous position.

Past and Expected Financial Performance

ATVI’s revenue and EPS grew at a CAGR of 3.1% and 25%, respectively, over the past 3 years. Also, the CAGR of the company’s free cash flow has been 7.4%.

The market expects the company’s revenue to increase by 27.8% in the current year and 2% next year. ATVI’s EPS is expected to decline by 5.7% in the current quarter, but grow 52% in the current year and 3.5% next year. Moreover, its EPS is expected to grow at a rate of 24.4% per annum over the next five years.

On the other hand, EA’s revenue and EPS grew at a CAGR of 3.2% and 5.8%, respectively, over the past 3 years. The CAGR of the company’s free cash flow has been 10%.

Analysts expect EA’s revenue to increase by 15.3% in the current year and 5.2% next year. The company’s EPS is expected to grow 16.7% in the current quarter, 13.5% in the current year, and 9% next year. Moreover, EA’s EPS is expected to grow at a rate of 13.8% per annum over the next five years.

ATVI has an edge over EA here as well.

Profitability

ATVI’s trailing-12-month revenue is 1.4 times of what EA generates. However, EA is the more profitable with a gross profit margin of 75.8% versus ATVI’s 72.3%. ATVI’s ROA of 8.5% compares favorably with EA’s 7.8%.

Valuation

In terms of forward P/E, EA is currently trading at 33.50x, 20.9% more expensive than ATVI which is currently trading at 27.71x. Though EA is less expensive in terms of trailing-12-month P/S (6.14x versus 7.79x), its forward PEG of 2.51x is 60.9% higher than ATVI’s 1.56x.

In terms of trailing-12-month price/cash flow, ATVI’s 29.48x is 74.9% higher than BABA’s 16.86x.

EA looks much more expensive compared to ATVI.

POWR Ratings

Both ATVI and EA are rated “Neutral” in our proprietary POWR Ratings system. Here are how the four components of overall POWR Rating are graded for ATVI and EA:

ATVI has a “B” for Buy & Hold Grade, and a “C” for Trade Grade, Peer Grade, and Industry Rank. In the 15-stock Entertainment – Toys & Video Games industry, it is ranked #5.

EA has a “C” for Trade Grade, Buy & Hold Grade, and Industry Rank, and a “D” for Peer Grade. It is ranked #6 in the 15-stock Entertainment – Toys & Video Games group.

The Winner

While both ATVI and EA are good long-term investments considering their market dominance, continued expansion, and growing global user base, ATVI appears to be a better choice based on the factors discussed here.

ATVI is a relatively cheaper option to bet on its valuable gaming franchises. Moreover, ATVI is a proven winner and the accelerating growth in demand for video games could help the company maintain its leadership position. However, investors should wait for a better entry point.

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ATVI shares were trading at $75.84 per share on Wednesday afternoon, down $1.27 (-1.65%). Year-to-date, ATVI has gained 28.47%, versus a 13.14% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...