Activision Blizzard, Inc. (ATVI) and Zynga Inc. (ZNGA) 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. On the other hand, ZNGA develops, operates, and markets social games as live services on mobile platforms, social networking platforms, and PC consoles. It also provides advertising services, branded virtual items, sponsorships for marketers and advertisers, and licenses its brands.

Pandemic-led restrictions to outdoor entertainment activities helped the video game industry to generate huge profits amid the pandemic. The expanding active user base incentivized companies to launch realistic PC and mobile games with powerful graphics and lower latency, esports on gaming platforms, and advanced gaming consoles.

Though the easing of restrictions was expected to slow down the demand, the launch of captivating content and advanced software is driving the industry’s growth. Investors’ interest in this space is evident from the Wedbush ETFMG Video Game Tech ETF’s (GAMR) 5.6% gains over the past three months. Rising interest in metaverse gaming and the evolution of blockchain and web3 gaming make the industry’s long-term growth prospects bright. The global video game market is expected to grow at a 9.7% CAGR to reach $225.10 billion by 2025. So, both ATVI and ZNGA should benefit.

ATVI is a winner with 13.5% gains versus ZNGA’s 6.1% returns in terms of the past month’s performance. But which of these stocks is a better pick now? Let us find out.

Latest Developments

On October 28, 2021, 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 December 21, 2021, ZNGA and Forte, a leading developer of blockchain solutions for game publishers, formed a strategic alliance to promote and pursue exciting opportunities in the evolving Web3 and blockchain games market. Also, this partnership will help leverage ZNGA’s intellectual property, brand, and community to develop blockchain games.

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, ZNGA’s revenue increased 31% year-over-year to $571.10 million. However, the company’s loss from operations came in at $12.30 million, indicating an 89.9% loss from the prior-year period. ZNGA’s net loss came in at $41.70 million for the quarter, representing a 65.9% year-over-year decline. Its loss per share decreased 63.6% year-over-year to $0.04. The company had $1.09 billion in cash and equivalents as of September 30, 2021.

Past and Expected Financial Performance

ATVI’s revenue and EBIT have increased at CAGRs of 8.1% and 28.4%, respectively, over the past three years. The company’s total assets have grown at 12.8% CAGR over the past three years.

Analysts expect ATVI’s EPS to grow 8.6% year-over-year in fiscal 2021 and 0.8% next year. Its revenue is expected to grow 3.9% year-over-year in fiscal 2021 and 4.3% next year. The company’s EPS is expected to increase at a 13.3% rate per annum over the next five years.

In comparison, ZNGA’s revenue and EBIT have grown at CAGRs of 45% and 167.1%, respectively, over the past three years. The company’s total assets have grown at 44.3% CAGR over the past three years.

ZNGA’s EPS is expected to decline 4.7% year-over-year in fiscal 2021 and 21.8% next year. The company’s revenue is expected to increase 41.1% year-over-year in fiscal 2021 and 11.3% next year. The company’s EPS is expected to grow at a rate of 6.7% per annum over the next five years.

Valuation

In terms of non-GAAP forward P/E, ZNGA is currently trading at 18.95x, 8.3% higher than ATVI’s 17.5x. In terms of non-GAAP forward PEG, ATVI’s 1.10x compares with ZNGA’s 4.21x.

Profitability

ATVI’s trailing-12-month revenue is almost 3.3 times what ZNGA generates. ATVI is also more profitable, with a 37.6% EBITDA margin versus ZNGA’s 27.7%.  

Furthermore, ATVI’s net income margin and ROE of 29.2% and 16.9%, respectively, compare favorably with ZNGA’s negative values.

POWR Ratings

While ATVI has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, ZNGA has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.  

Both ATVI and ZNGA have a B grade for Value, which is in sync with their lower-than-industry valuation ratios. ATVI has a 12.42 forward EV/EBIT ratio, 24.7% lower than the 16.49x industry average. ZNGA’s 11.71 forward EV/EBIT multiple is 29% higher than the industry average of 16.49x.

ATVI has a B grade for Quality, consistent with its higher-than-industry profitability ratios. ATVI’s 29.2% trailing-12-month net income margin is 347.2% higher than the 6.5% industry average. In comparison, ZNGA’s C grade for Quality is in sync with its negative profit margin. 

Of the 23 stocks in the C-rated Entertainment - Toys & Video Games industry, ATVI is ranked #5, while ZNGA is ranked #16.

Beyond what we have stated above, our POWR Ratings system has also rated ATVI and ZNGA for Growth, Sentiment, Momentum, and Sentiment. Get all ATVI ratings here. Also, click here to see the additional POWR Ratings for ZNGA.

The Winner

The pandemic-led surge in the video gaming industry is expected to slow down as increasing vaccination rates make access to outdoor activities safe. However, the introduction of advanced gaming content, growing interest in the metaverse, and the evolution of the web3 and blockchain gaming should drive ATVI and ZNGA’s growth in the future. But, relatively lower valuation and higher profitability 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.

ATVI shares were trading at $66.89 per share on Monday afternoon, up $0.36 (+0.54%). Year-to-date, ATVI has declined -27.61%, versus a 28.90% rise in the benchmark S&P 500 index during the same period.

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...