Activision Blizzard, Inc. (ATVI) in Santa Monica, Calif., and San Francisco-based Skillz Inc. (SKLZ) are two established players in the video gaming industry. ATVI develops and publishes interactive entertainment content and services across various gaming platforms, through subscription, full-game, and in-game sales, and by licensing software to third-party or related-party companies that distribute Activision and Blizzard products. In comparison, SKLZ delivers a mobile game platform that hosts tournaments and competitions, serving and connecting game developers and end-users worldwide.
The launch of immersive and realistic games, esports competitions on gaming platforms, and efficient gaming consoles enabled the video game industry to generate huge profits and expand its active user base over the past year. However, supply chain pressures in the competitive, high-demand market caused a 10% year-over-year decline in sales in November 2021.
Nevertheless, the companies’ ongoing efforts to provide captivating content, powerful graphics, and advanced software have boosted investor optimism about the industry. This is evidenced by the Wedbush ETFMG Video Game Tech ETF’s (GAMR) 5.1% over the past three months. Also, a rising interest in metaverse gaming enhances the industry’s long-term growth prospects. The global video game market is expected to grow at a 9.7% CAGR to $225.10 billion by 2025. So, both ATVI and SKLZ should benefit. ATVI’ shares have delivered 3.1% price gains versus SKLZ’s negative returns in terms of its past one month’s performance. But which of these stocks is a better pick now? Let us find out.
Click here to check out our Video Game Industry Report
On October 28, ATVI announced the acquisition of Barcelona-based mobile game developer Digital Legends. It joins ATVI’s growing roster of independent studio teams, supporting the development of an unannounced Call of Duty mobile title. Digital Legends’ expertise in high-quality mobile titles for mobile should help ATVI’s mobile talent pool grow substantially.
On August 2, SKLZ formed a strategic partnership with Exit Games, a Germany-based company and the global developer of Photon, the world’s most advanced synchronous multiplayer gaming technology. The partnership will dramatically accelerate SKLZ’s timeline to support multiplayer synchronous content on the platform and will give permanent access to Exit’s technology to power its esports tournaments and platform exclusively.
Recent Financial Results
ATVI’s total net revenues for its fiscal third quarter, ended September 30, 2021, increased 5.9% year-over-year to $2.07 billion. The company’s non-GAAP operating income came in at $893 million, up 4.3% from the prior-year period. While its non-GAAP net income increased 2.3% year-over-year to $699 million, its non-GAAP EPS increased 1.1% to $0.89. The company had $9.72 billion in cash and cash equivalents as of September 30, 2021.
For its fiscal third quarter, ended September 30, 2021, SKLZ’s revenue increased 70.2% year-over-year to $102.07 million. The company’s loss from operations came in at $81.64 million, indicating a 185.8% rise from the year-ago period. SKLZ’s net income was $50.78 million for the quarter, compared to a$42.85 million loss in the prior-year period. Its loss per share increased 14.3% year-over-year to $0.16. As of September 30, 2021, the company had $540.31 million in cash and equivalents.
Expected Financial Performance
Analysts expect ATVI’s EPS to rise 9.5% year-over-year in the current year and marginally next year. Its revenue is expected to grow 3.6% year-over-year in the current year and 3.5% next year.
In comparison, SKLZ’s EPS is expected to remain negative in the current year and next year. The company’s revenue is expected to increase 69.1% year-over-year in the current year and 41% next year.
In terms of non-GAAP P/E, ATVI is currently trading at 16.86x, versus SKLZ’s negative 20.65x. And in terms of forward EV/Sales, ATVI’s 4.93x compares with SKLZ’s 7.53x.
ATVI’s trailing-12-month revenue is almost 26.4 times SKLZ’s. ATVI is also more profitable, with a 37.6% EBITDA margin versus SKLZ’s negative value.
Furthermore, ATVI’s ROA, ROE, and ROTC of 16.9%, 9%, and 10.6%, respectively, compare favorably with SKLZ’s negative returns.
While ATVI has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, SKLZ has an overall F grade, equating to Strong Sell. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
ATVI has a B grade for Value, which is in sync with its lower-than-industry valuation ratios. ATVI has an 11.77 forward EV/EBIT ratio, which is 27.1% lower than the 16.14x industry average. SKLZ’s D grade for Value reflects its overvaluation. SKLZ’s 8.91 forward Price/Sales multiple is 411.7% higher than the 1.74x industry average.
ATVI has a B grade for Quality, which is consistent with its higher-than-industry profitability ratios. ATVI’s 30.4% trailing-12-month levered free cash flow margin is 175.3% higher than the 11% industry average. In comparison, SKLZ’s D grade for Quality is in sync with its negative profit margins.
Of the 23 stocks in the C-rated Entertainment – Toys & Video Games industry, ATVI is ranked #5, while SKLZ is ranked #23.
Beyond what we have stated above, our POWR Ratings system has also rated ATVI and SKLZ for Growth, Momentum, Stability, and Sentiment. Get all ATVI ratings here. Also, click here to see the additional POWR Ratings for SKLZ.
The rising demand for video game consoles and software, investor optimism, and ongoing efforts to address the semiconductor chip shortage should enable both ATVI and SKLZ to grow substantially. However, its relatively lower valuations and higher profit margins we think make ATVI a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Entertainment – Toys & Video Games industry.
Click here to check out our Video Game Industry Report
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ATVI shares were trading at $65.07 per share on Thursday afternoon, up $0.97 (+1.51%). Year-to-date, ATVI has declined -29.58%, versus a 27.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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