EA: Unity Software vs. Electronic Arts: Which Video Game Stock is a Better Buy?

Electronic Arts Inc. (EA - Get Rating) and Unity Software Inc. (U - Get Rating) are two popular game engine platforms that publish numerous games and productivity software for personal computers and other devices. EA develops and distributes games and services across various genres, such as sports, first-person shooter, action, role-playing and various others. U provides software solutions to create, run, and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, and PCs.

Because people have been forced to stay at home and find entertainment there however they can amid the pandemic, the video gaming industry has seen an explosion of demand. Since gaming is now rapidly becoming a mainstream entertainment, video game publishers are under increased pressure to deliver the content gamers demand.

With a significant surge in consumer spending on console hardware, headsets, gamepads, and digital full-game, gaming companies EA and U have a substantial opportunity to grow this year and beyond.

In terms of their past three-months’ performance, EA is the clear winner with 14.5% gains versus U’s negative returns. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

Last month, U and Verizon collaborated to provide 5G, mobile edge computing and real-time 3D technology gaming and enterprise applications. Because 5G is needed widely to facilitate real-time 3D experiences, the partnership should allow U to better meet the market’s demands. In December, U entered a partnership with Snap Inc. to extend the reach of Unity’s ads to Snapchat advertisers and bring Snap technology to game developers through Snap Kit. The collaboration should help U better reach a highly engaged mobile gaming audience on both Android and iOS.

This month, EA completed the acquisition of Codemasters Group Holdings plc to bring gaming fans new and exciting racing content, while reaching across more platforms and more regions of the world. The combined portfolio should enable further growth and continued success for EA.

This month, EA announced that Plants vs. Zombies: Battle For Neighborville Complete Edition will debut on Nintendo Switch on March 19. The company also recently unveiled Knockout City, an action-packed multiplayer game, with Velan Studios. These developments should allow EA to provide a high-energy and innovative experience to its gamers.

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Recent Financial Results

In the fourth quarter, ended December 31, 2020, U’s total revenue grew 39% year-over-year to $220.33 million, while its gross profit grew 31% from the year-ago value to $167.83 million. The company reported a loss from operations of $80.85 million and a net loss of $83.50 million. Its net cash provided by operating activities was $14.8 million over this period.

EA’s net revenue has increased 5% year-over-year to $1.67 billion in the fiscal third quarter ended December 31, 2020. The company’s operating cash flow grew 1.8% from the prior-year quarter to $1.12 billion, while its net bookings rose 18.8% from the year-ago value to $2.40 billion. Its cash and cash equivalents increased 32.4% year-over-year to $4.77 billion.

Expected Financial Performance

Analysts expect U’s revenue to increase 25.7% in the current year and 27.4% next year. The company’s EPS is expected to grow 10.3% in 2021 and 54.3% next year. Moreover, its EPS is expected to grow at a rate of 26% per annum over the next five years.

In comparison, analysts expect EA’s revenue to increase 16.6% in the current year and 6.7% next year. The company’s EPS is expected to grow 15.8% in fiscal 2021 and 10.1% next year. Moreover, EA’s EPS is expected to grow at a rate of 14.5% per annum over the next five years.

Profitability

EA’s trailing-12-month revenue is more than 7 times U’s. But U is slightly more profitable, with a gross profit margin of 77.7% versus EA’s 74.5%.

However, EA’s ROE and ROA of 15.5% and 6.7%, respectively, compare favorably with U’s negative returns.

Valuation

In terms of trailing-12-month price/sales, U is currently trading at 24.32x, 246.4% higher than U, which is currently trading at 7.02x. Also, its trailing-12-month ev/sales of 37.03x is 514.1% higher than EA’s 6.03x.

So, EA is the more affordable stock.

POWR Ratings

U has an overall rating of C, which translates to a Neutral in our proprietary POWR Ratings system. However, EA has an overall rating of B, which represents a Buy. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

EA has a Value Grade of B, which is consistent with its lower-than-industry forward PEG. In comparison, U has a Value Grade of C.

Also, EA has a grade of B for Momentum, which is consistent with its price returns over the past three months. In comparison, U has a Momentum Grade of C.

In terms of Quality Grade, EA has a B given its higher profitability. U’s Quality Grade of C is reflective of its lower profitability.

Of 24 stocks in the B-graded Entertainment –Toys & Video Games industry, U is ranked #18 while EA is ranked #2.

Beyond what I’ve stated above, our POWR Ratings system also rates U and EA for Growth, Stability, and Sentiment. Get all of U’s ratings here. Also, click here to see the additional POWR Ratings for EA.

The Winner

While both U and EA are good long-term investments considering their market dominance and continued expansion, EA appears to be a better buy based on the factors discussed here.

Even though U is developing new tools to cater to the world of real-time 3D gaming content, we think its lower profitability, weaker financials and premium valuation make it a riskier investment option compared to EA.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. If you’re looking for other top-rated stocks in the Entertainment –Toys & Video Games industry, click here.

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EA shares were trading at $135.72 per share on Friday afternoon, up $0.48 (+0.35%). Year-to-date, EA has declined -5.49%, versus a 2.60% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...