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Better Buy: Electronic Arts vs. Zynga

By Nicholas Rossolillo – Sep 23, 2016 at 10:11AM

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The video gaming industry is undergoing change as consumer preferences shift toward digital formats and mobile gaming.

Business has slowed down for Electronic Arts (EA -0.74%) in the last year, and Zynga (ZNGA) is still attempting to mount a comeback under new leadership. The two companies have a different slant on the world of video gaming, one with roots in the console-based business and the other in mobile. With the important holiday shopping season right around the corner, which is a better buy for investors right now?

Is EA losing its edge?

Electronic Arts' Madden NFL franchise. Image source: Electronic Arts.

Electronic Arts recently reported results for the first quarter of its fiscal year, and the business turned in higher-than-expected numbers. Total revenue was $1.27 billion, 5.7% higher than the same quarter last year and 1.7% above previous company guidance.

Profit also came in better than expected. Earnings per share were $1.40, 6.1% higher than last year's quarter and 7.7% above company guidance. Despite the strong numbers during the quarter, the picture changes slightly when we look at the last trailing-12-month period.

Over the last 12 months, revenue is down 0.8% to $4.46 billion from $4.50 billion a year ago. The main reason is that sales of packaged games are down 10.3%. This figure is mostly, but not quite completely, offset by the 8.3% increase in digital sales in the last year.

The revenue numbers show a shift in the way customers make purchases. Rather than buying physical product, gamers are opting to make digital purchases where a copy of the game is downloaded to their console or computer. Sales have been moving this direction for the last few years and have been more than offsetting declines in physically packaged games until the last year.

However, this is more indicative of EA hitting a short-term soft spot in game sales rather than a long-term slowdown. Sales are expected to get a boost during the upcoming holiday shopping season when new chapters in the popular Titanfall and Battlefield franchises are released late in October.

The company guided revenue up to $4.75 billion this year, up from $4.4 billion last fiscal year. The anticipated increase in sales is seen coming from the new big titles coming out next month, as well as growth from the company's newer mobile gaming division that targets smartphone and tablet users. Far from sputtering, Electronic Art's business appears to be poised to grow further in the year ahead.

Zynga fighting to make a comeback

Image source: Zynga.

Social game developer Zynga also recently reported quarterly results that beat previous company guidance. Revenue was $181.7 million, down 9.1% from last year. Despite the drop in the top line, the bottom-line loss of $0.03 per share from a year ago narrowed to a $0.01 loss this last quarter.

Revenue has been consistently down this year from a year ago, but the company continues to inch its way toward profitability anyway as new CEO Frank Gibeau tightens up expenses and helps the business "do more with less." Through the first six months of Zynga's fiscal year, the bottom-line loss has been cut in half from the first six months of last year.

Despite progress made, the company still has a lot of work to do. Guidance for the next quarter was for revenue to still be down 13% to 8% from last year with another bottom-line loss of $0.03 to $0.04 per share.

Zynga focuses on free-to-play mobile games that generate revenue through advertising and in-game purchases. While this revenue model has been under pressure in recent years from increasing competition in the mobile game space, the company hopes to recapture interest with ad partners by growing its user base.

New game releases have started to help in recent months, with a new FarmVille game the most recent. New features have also been added to existing games like Words With Friends to lure casual gamers back. Slated for release during the holiday season is the new Dawn of Titans title, which aims to display mobile gaming's newfound complexity that can rival that of console-based video games.

Progress is being made, but it is still too early to say when Zynga will finish its turnaround strategy. However, Gibeau is formerly of Electonic Arts, with his last position there being the head of the mobile gaming division. With his help, the mobile division went from a non-reportable item for EA to a $500-million-a-year business. Under his tutelage, it is worth keeping an eye on Zynga's progress.

And the winner is...

Though Zynga is starting to show signs of progress on its turnaround, Electronic Arts already has a developed business with a recipe for not only profitability, but also growth. In the quarters ahead, Electronic Arts has guided sales higher led by new title releases and the move toward digital gaming. For that reason, I think Electronic Arts is a better buy than Zynga at this point in time.

Nicholas Rossolillo has no position in any stocks mentioned. The Motley Fool recommends Electronic Arts. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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