Which Video Game Publisher Should You Own?

When I look at the video game industry, three main players in the traditional third-party publisher segment stand out to me: Activision Blizzard (NASDAQ: ATVI  ) , Electronic Arts (NASDAQ: EA  ) and Take-Two Interactive Software (NASDAQ: TTWO  ) . The reason is simple; each company represents something different and unique in an industry that has been notoriously difficult for investors to navigate in recent years.

Three main players
The following table breaks down the three aforementioned companies' key fundamental metrics: 

Company

Activision Blizzard

Electronic Arts

Take-Two Interactive

Market Cap

14.63B

8.42B

1.59B

Debt

4.69B

575M

448.74M

Cash

4.44B

2.07B

972.17M

ROIC

8.68%

-1.41%

34.39%

Net Profit Margin

24.64%

-0.98%

15.17%

Dividend/Yield

$0.20/1.00%

NA/NA

NA/NA

The data above indicates that the three companies are very different from one another. Activision is a large-cap company, Electronic Arts is a mid-cap company, and Take-Two is a small-cap company. However, all three companies fare well with healthy debt and cash levels, in comparison with companies that have similar market caps.

Take-Two leads these competitors on the all-important return on invested capital metric, which effectively measures management's ability to allocate capital to profitable investments. On the other hand, Activision's impressive net profit margin of 24.64% leads these peers by a wide margin. Additionally, Activision is the only listed company to pay a dividend.

Perhaps what the table above indicates best is just how subpar Electronic Arts is fundamentally in comparison with peers. The company's negative ROIC and net profit margin should be unacceptable to investors since they indicate inefficiency at the managerial level and they stand in stark contrast to the figures for both Activision and Take-Two.

Content lineups
Aside from strong fundamentals and key metrics, the most important aspect by which investors judge the major video game publishers is their game lineups. The following table breaks down all three companies' most important titles/franchises:

Activision Blizzard

Electronic Arts

Take-Two Interactive

Call of Duty

Madden

Grand Theft Auto

World of Warcraft

Fifa

Bioshock

Diablo

Battlefield

Borderlands

Starcraft

Need for Speed

Red Dead Redemption

Skylanders

Mass Effect

NBA 2K

All three companies have very solid game lineups and it is hard to pick a definitive winner here. However, I think the strongest content lineup belongs to the weakest company, Electronic Arts. No other video game publisher has a stable of games that is as diverse as the Electronic Arts library. The company has ample blockbuster series in the sports, action, and drama genres.

Looking ahead, all three game publishers should benefit as the newly launched generation of video game consoles from Microsoft and Sony continues to pick up steam and becomes more widely adopted.

Activision Blizzard is set to release the eagerly anticipated new first person shooter/role-playing game Destiny from critically acclaimed developer Bungie in 2014. The company recently announced that a beta version will be released in the summer of 2014 and the full game will go on sale on September 9th for Microsoft and Sony consoles. 

Meanwhile, Electronic Arts is set to release the Microsoft- and PC-exclusive online game Titanfall in March of this year. Additionally, sequels to popular titles like Mirror's Edge and Mass Effect loom on the horizon.  Of course, the company is still preparing its yearly installments of sports games like those of the Madden, Fifa and NHL series. 

Finally, small video game publisher Take-Two, best known for its gigantic crime series Grand Theft Auto, is busy working on new games. The relatively sporadic nature of Take-Two's release schedule, which is due primarily to the lengthy development process of mega-blockbusters like GTA, makes the company somewhat of an unpredictable investment in the near-term. However, in the long-term no game publisher has shown a greater ability to consistently generate high-quality blockbuster series.

While a sequel to Grand Theft Auto 5 should not be expected anytime soon judging by prior release timetables, there remain opportunities for the small publisher to capitalize on previous successes. A sequel to the popular title Red Dead Redemption should be expected relatively soon, and eventual sequels to franchise hits like Borderlands and Bioshock have to be considered as well.

Three choices
The choice is clear for investors traversing the video game publisher segment. The safest investment is clearly Activision Blizzard considering its impressive fundamental metrics and dividend as well as its strong performance as of late. Although Electronic Arts is clearly the worst investment on paper, the company's incredibly strong content lineup means that with effective leadership, a turnaround is possible.

Finally, Take-Two remains the wild card in the space. The small company has shown that it is capable of big things and this will likely continue in the future, albeit at a methodical pace. Additionally, Take-Two's size is small enough for the company to remain a buyout candidate.

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