An investment in either Electronic Arts (NASDAQ:EA) or Activision Blizzard (NASDAQ:ATVI) would have yielded tremendous returns over the last five years, and each stock now trades in the neighborhood of lifetime highs. With both companies benefiting from the growth of high-margin digital sales and indications that the video game industry will continue to post solid growth over the long term, it's possible that each publisher will continue to thrive and deliver wins for their shareholders, but it's still worth diving into which looks like the better buy.
Knowing for certain which stock will perform better down the stretch is impossible, but a comparison of their characteristics and opportunities down the line might hold the answer.
Stock and business metrics
|Metric||Electronic Arts||Activision Blizzard|
|Market cap||$35 billion||$46 billion|
|Revenue TTM||$4.9 billion||$6.9 billion|
|Profit Margin TTM||20%||14.6%|
|Free Cash Flow TTM||$1.3 billion||$2.1 billion|
|Net Cash||$2.5 billion||$3.2 billion|
|Five-Year Stock Performance||836%||408%|
The outlook for Electronic Arts
Electronic Arts has built its business around popular licensed franchises and has successfully orchestrated a turnaround over the last five years thanks to improved quality of output and digital sales momentum. The company has sole rights to the NFL and FIFA brands and exclusive rights to make titles based on the Star Wars license. These are powerful properties that virtually guarantee a certain base level of sales -- reducing certain elements of risk and costs associated with developing new intellectual properties (IPs).
Acquiring licensing rights isn't cheap, but, at least in the case of its sports games, this model allows the company to release annual entries in big franchises that deliver updated rosters and statistics and new modes -- but otherwise have small production costs compared to most games that put up similar sales. This is one of the reasons that EA has recently delivered superior profit margins compared to Activision, and its margin advantage could become more pronounced as digital sales continue to make up a greater portion of each company's revenues. Both publishers are seeing profits on console game sales increase, but the benefit will be bigger for EA if its development costs remain lower.
That's not to say that EA isn't investing in new IPs, and upcoming properties like Anthem could spawn promising franchises, but most of its sales currently come from its licensed titles. The company does own some potent IPs, including the Battlefield, The Sims, and Need for Speed franchises, but there's been limited success in recent years when it comes to creating new properties with growth potential and staying power. The dependability of titles based on hit licenses and the strength of EA's own core IPs means that's not a dealbreaker, but it stands out as a notable point of distinction when comparing the company to Activision Blizzard.
The outlook for Activision Blizzard
Activision Blizzard has the strongest lineup of original franchises among any third party video game publisher and an impressive history when it comes to creating new IPs. Of course, past performance does not guarantee future results, and Activision's reliance on developing and maintaining its own properties also has drawbacks.
There's good reason for the excitement that still surrounds its most recent new IP, Overwatch, but there are costly misfires worth remembering. As just one example, the company's Blizzard wing spent seven years developing Project Titan, a game that was intended to be the next big thing in the MMORPG genre but was ultimately canceled. Activision's focus on creating and owning its properties gives the company more upside potential, but it comes with increased risk as well.
Activision also holds some debt on its books while EA is cash positive, but the latter company paid down roughly $500 million against its loans last quarter and generates ample free cash flow to continue reducing what it owes. Activision added to its debt load in order to fund acquisitions, including the company's $5.9 billion purchase of Candy Crush Saga developer King Digital -- a move made to rapidly build its position in the mobile games market. The last fiscal year saw 25% of Activision's sales come from its mobile segment, while EA's mobile games accounted for only 4% of its revenues. With global spending of roughly $41 billion, the mobile games industry is larger and still growing faster than its console and PC counterparts, so Activision's edge in this category looks to be meaningful -- particularly as the company experiments with mobile advertising revenues and brings some of its hit IPs like Call of Duty to the space.
The strength of Activision's properties also looks to give the company better growth opportunities in esports and virtual reality and opens up big opportunities for merchandise sales and bridging its properties to film and television.
So, which is the better buy?
Electronic Arts trades at a lower multiple while Activision Blizzard looks to have bigger growth potential, setting up a difficult choice between the two stocks. Investing in either company is likely a good play for the long-term investor looking for video game-industry exposure, but I think that the strength of Activision's properties, position in mobile, and history of innovation give it the edge.
Activision Blizzard is already a leader in emerging categories like esports, with five of the 10 most-watched games on Amazon's Twitch and its own Major League Gaming network and distribution platform, and I think there's big potential in the company's recently launched consumer products division. Electronic Arts looks like a great business, particularly with CEO Andrew Wilson continuing the quality-improvement initiatives that propelled his company's turnaround, but none of its original properties standout as having comparable cross-medium potential to franchises like Overwatch, Call of Duty, and Destiny.
Investing in both companies could be the right move, but, if I had to pick one, I'd go with Activision Blizzard.
Keith Noonan owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.