The video game industry is undergoing major changes in how gamers experience content. A perfect example is Twitch.tv, where an estimated 185 million people tuned in last year to watch others play games. Being a successful video game company is no longer about releasing a hit game that sells millions of copies and moving on to the next big hit. Hit games are still essential to success in the industry, but the best video game company to own over the next 10 years will be one that builds a growth platform in other areas adjacent to games, such as esports, in-game advertising, and consumer products.
What we're going to do is first look at the basic difference between Take-Two Interactive (TTWO +0.92%) and Activision Blizzard (ATVI +0.00%) on financials and valuation, and later review how each is positioned across these new growth opportunities to determine which is the best video game stock to buy for the next 10 years.
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Financials and valuation
| Metric | Revenue | Free Cash Flow | Market Cap | Trailing P/E | Dividend Yield |
|---|---|---|---|---|---|
| Activision Blizzard | $6,939 | $1,874 | $45,911 | 25.4 | 0.49% |
| Take-Two | $1,886 | $303 | $9,418 | 29.2 | NA |
Data source: 10-Q and 10-K SEC filing. Dollar amounts in millions. Financial data is based on trailing twelve month period.
Both Take-Two and Activision Blizzard have produced best-selling titles that have led to these numbers. Activision Blizzard has eight franchises that have generated at least $1 billion in revenue life-to-date. In the last three years, Activision has released certain titles -- including Hearthstone, Heroes of the Storm, and Overwatch -- that are specifically designed to take advantage of the growing interest in esports and the industry shift to digital distribution. These games also generate high player engagement, providing Activision the opportunity to sell players additional in-game content in the form of micro-transactions, which generates a higher margin than sales of game discs.
| Metric | 2017 Revenue Guidance | 2017 Non-GAAP Earnings Per Share Guidance | Forward P/E |
|---|---|---|---|
| Activision Blizzard | $6,400 | $1.94 | 31.4 |
Data source: Q2 2017 Earnings press release. Dollar amount in millions except per share data.
Take-Two is smaller revenue-wise than Activision, which reflects Activision's larger portfolio of popular franchises, but this is not necessarily a bad thing for Take-Two. Take-Two is doing just fine with its own franchises, generating consistent annual cash flow from the same digital distribution trend benefiting Activision Blizzard. Take-Two's Grand Theft Auto V continues to drive high player engagement four years after its release, and next year's release of Red Dead Redemption 2 should deliver one of the best years in company history, which is reflected in fiscal 2019 guidance.
| Metric | Fiscal 2018 Revenue Guidance | Fiscal 2019 Revenue Guidance | Fiscal 2018 Cash Flow Guidance | Fiscal 2019 Cash Flow Guidance | 2018 Forward P/E | 2019 Forward P/E |
|---|---|---|---|---|---|---|
| Take-Two | $1.62 to $1.72 billion | $2.5 billion | $200 million | $700 million | 42.6 | 21.4 |
Data source: Take-Two press release. Forward P/E data based on analyst estimates provided by Yahoo Finance.
Both Activision and Take-Two trade for high price-to-earnings ratios, however, analysts expect both companies to grow earnings about 20% annually over the next five years. Activision trades at a P/E of 24 based on analysts earnings estimates for 2018, which is not that much higher than Take-Two's 21. Therefore, I wouldn't give either company an advantage on the basis of valuation alone. We can find a better distinction between the two if we compare each company's growth initiatives.
Growth opportunities
When looking at growth opportunities outside of creating new games, the pendulum swings in Activision's favor. Activision's diverse portfolio of highly engaging franchises provide an important advantage in the treasure trove of in-game characters and other trademarked property it can use to become the video game equivalent of Walt Disney.
It's no joke. Activision is very much a company on the move, aggressively pursuing bold initiatives to capitalize on wildly popular franchises like Call of Duty and Overwatch. The company recently set up two new divisions -- Activision Blizzard Studios and Consumer Products -- to make feature films, comics, collectibles, and merchandise based on hit franchises. Probably the biggest thing happening within these divisions right now is the development of a new Marvelesque Call of Duty movie, which looks like a very promising effort that could see a much better result than the recent Warcraft movie (which was based on Blizzard's World of Warcraft franchise).
In the near term, one of the biggest opportunities for Activision is Overwatch League, where the best Overwatch players in the world will team up in major cities around the world and compete in a regular season and playoff, just like a traditional sports league. Take-Two has its own esports opportunity with NBA 2K eLeague, based on the best-selling basketball franchise.
Other than esports, the Grand Theft Auto maker recently dived into mobile gaming with its recent acquisition of Social Point for $250 million, but this pales in comparison to Activision's purchase in 2016 of King Digital Entertainment for $5.9 billion. The push into mobile gaming gives both companies the opportunity to develop a profitable new stream of revenue from in-game advertising over the long term. But, again, Activision is in a stronger position to make a bigger splash by controlling -- via King -- two of the most popular games on mobile, Candy Crush and Bubble Witch. Hence, the bigger price tag for Activision's King acquisition as opposed to Take-Two's Social Point.
Which is the better buy?
Although I believe Take-Two is a good investment that I would be happy to have in my portfolio, if we're determining what is the single best video game stock to own right now between the two, it has to be Activision Blizzard, because of CEO Bobby Kotick's vision to create an interactive entertainment empire spanning movies, consumer products, and esports based on a broad portfolio of major franchise brands.
