Electronic Arts Inc. (EA) and Take-Two Interactive Software, Inc. (TTWO) are two established players in the video gaming industry. EA develops, publishes, and distributes branded interactive entertainment software across various genres for video game consoles, PCs, handheld game players, and cellular handsets worldwide. It also provides online game-related services. TTWO develops, publishes, and distributes interactive entertainment software games and consoles worldwide. It provides its products through physical retail, digital download, online platforms, and cloud streaming services.
Though limited outdoor entertainment options have led to the video game industry witnessing an expanding user base and generating significant returns last year, increasing vaccination rates and decreasing COVID-19 cases are paving the way for outdoor entertainment options to people. To maintain or grow this user base, companies in this space are developing new versions of their most popular games with better graphics, low latency, and quality. The global gaming market is expected to grow at a 13.2% CAGR to reach $545.98 billion by 2028. So, both EA and TTWO should benefit.
While TTWO lost 10% over the past six months, EA has lost 5%. Which of these stocks is a better pick now? Let’s find out.
On October 1, 2021, EA announced the launch of EA SPORTS FIFA 22, offering the revolutionary next-gen HyperMotion gameplay technology on PlayStation5, Xbox Series X|S, and Stadia. Keeping in view the huge user base for this game, the company believes this HyperMotion technology offering will not revolutionize the FIFA franchise, but it will also forever change the sports video game landscape.
On September 10, 2021, TTWO’s 2K video game publisher announced the availability of NBA 2K22 on current- and new-generation platforms worldwide. NBA 2K22 offers best-in-class visual presentation and player AI, historic teams, and various basketball experiences with online community features and deep, varied game modes. As people gain more interest in basketball through the rising popularity of the NBA and the virtual experiences, the company expects to witness rising demand for this game in the near term.
Recent Financial Results
EA’s net revenues for its fiscal first quarter ended June 30, 2021, increased 6.3% year-over-year to $1.55 billion. The company’s gross profit came in at $1.24 billion, representing a 5.6% year-over-year improvement. Its operating income came in at $322 million, down 31.6% from the prior-year period. While its net income decreased 44.1% year-over-year to $204 million, its EPS decreased 43.2% to $0.71. The company had $4.01 billion in cash and cash equivalents as of June 30, 2021.
For its fiscal first quarter ended June 30, 2021, TTWO’s net revenue decreased 2.2% year-over-year to $813.35 million. However, the company’s gross profit came in at $483.63 million, up 36.4% from the prior-year period. Its income from operations came in at $170.47 million, representing a 107.5% year-over-year improvement. TTWO’s net income of $152.26 million for the quarter represents a 72% rise from the prior-year period. Its EPS increased 68.8% year-over-year to $1.30. The company had cash and cash equivalents of $1.40 billion as of June 30, 2021.
Past and Expected Financial Performance
EA’s revenue and EBITDA have grown at CAGRs of 5.8% and 1.3%, respectively, over the past three years. The company’s total assets have grown at a CAGR of 15.6% over the past three years.
Analysts expect EA’s EPS to increase 15.3% year-over-year in the current year and 11.9% next year. Its revenue is expected to increase 22.4% year-over-year in the current year and 6.5% next year. Analysts expect the stock’s EPS to grow at a 26.3% rate per annum over the next five years.
In comparison, TTWO’s revenue and EBITDA have grown at CAGRs of 23.9% and 54.1%, respectively, over the past three years. The company’s total assets have grown at a CAGR of 22.3% over the past three years.
Analysts expect TTWO’s EPS to decrease 30.9% year-over-year in the current year and rise 44.6% next year. Its revenue is expected to fall 4.4% in the current year and 17.6% next year. The stock’s EPS is expected to grow at a 12.3% rate per annum over the next five years.
In terms of non-GAAP forward PEG, TTWO is currently trading at 3.57x, 158.7% higher than EA’s 1.38x. In terms of forward EV/Sales, TTWO’s 21.75x is 45.5% higher than EA’s 14.95x.
EA’s trailing-12-month revenue is almost 1.8 times higher than what TTWO generates. EA is also more profitable, with a 73.4% gross profit margin versus TTWO’s 59.5%.
Also, EA’s levered free cash flow margin of 24.5% compares favorably with TTWO’s 16.2%.
While TTWO has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, EA has an overall B grade, equating to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
EA has a B grade for Sentiment, which is consistent with favorable analyst estimates. Analysts expect EA’s EPS to grow 15.3% year-over-year in the current year to $6.63. However, TTWO’s C grade for Sentiment is in sync with analysts’ lower expectations for its EPS. The company’s EPS is expected to decline 30.9% year-over-year to $4.55.
EA has a B grade for Quality, which is consistent with its higher-than-industry profitability ratios. EA’s 24.5% trailing-12-month levered free cash flow margin is 114.2% higher than the 11.4% industry average. However, TTWO’s C grade for Quality is in sync with its relatively lower profitability ratios. TTWO’s trailing-12-month levered free cash flow margin of 16.2% is 41.8% higher than the industry average of 11.4%.
Of the 24 stocks in the C-rated Entertainment – Toys & Video Games industry, TTWO is ranked #12, while EA is ranked #6.
Beyond what we’ve stated above, our POWR Ratings system has also rated EA and TTWO for Growth, Value, Momentum, and Stability. Get all TTWO ratings here. Also, click here to see the additional POWR Ratings for EA.
Rising investments to address the semiconductor chip shortage and continued innovations should help the video game industry maintain steady growth despite shifting focus on outdoor activities. Therefore, EA and TTWO should benefit. However, relatively higher profitability and lower valuation make EA 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.
EA shares . Year-to-date, EA has declined -6.30%, versus a 17.46% 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…