Activision Blizzard (NASDAQ:ATVI) is currently the fourth best-performing stock on the S&P 500 -- up almost 80% so far this year. That growth looks tame compared to its rival, Take Two Interactive (NASDAQ:TTWO), though, whose shares have more than doubled since the start of 2017.
Yet while both companies are poised for strong sales gains and rising profitability, growth investors should prefer Activision over its smaller rival today.
Take Two's business is far more reliant on just a handful of its franchise properties to deliver almost all its operating gains. The Grand Theft Auto brand by itself accounted for nearly 40% of revenue last year, for example, and the developer's five biggest franchises generated 90% of sales in 2016. That setup exposes the business to huge sales spikes, especially following a new GTA release, but it also produces major risks for investors. The company warns in its 10-K that Take Two's business will stumble "if we fail to continue to develop and sell new commercially successful 'hit' titles or sequels to such 'hit' titles or experience any delays in product releases."
Activision faced a similar issue a few years ago, given that three of its franchises, Call of Duty, World of Warcraft, and Skylanders, were responsible for 80% of revenue in 2013. Since then, though, management has deepened the portfolio by developing major new properties including Overwatch, Hearthstone, and Destiny. It also acquired the massive casual gaming hit Candy Crush. As a result of those moves, Activision's gaming properties span many more genres, business models, and franchises, so its future growth shouldn't be nearly as volatile as Take Two's.
Activision Blizzard is doing a better job at capitalizing on the surge toward digital content delivery. For the industry leader, that segment includes monthly fees from the subscription-based World of Warcraft title along with downloadable content like expansion packs, microtransactions, and fully downloadable games. Altogether, digital sales made up 73% of the business last year, up from 53% in 2015. Take Two's digital segment, in contrast, just ticked up to 52% of the business in 2016 from 49% the prior year.
That gap translates into a significant profitability difference since digital sales have such higher margins. Activision's operating margin is now more than twice Take Two's result, in fact.
Finances and outlook
Activision Blizzard has been consistently profitable for over a decade, whereas Take Two has booked a net loss in four of the past seven fiscal years. That's a serious knock against Take Two, but the market leader really shows off its financial strength in this match-up when it comes to cash flow.
Activision's operating cash passed $2 billion last year, up from $1.3 billion in 2012. Meanwhile, Take Two's cash metric held roughly steady at $330 million.
A key factor behind Take Two's stock price surge lately has been building optimism around its upcoming game releases. New installments in the NBA 2K and Red Dead Redemption franchises should spark solid sales growth, and the next GTA title, whenever it comes, will likely dominate sales charts considering how profitable GTA V has been over the last few years.
Activision Blizzard has a busy schedule ahead, too, with a Destiny sequel having just come out and a Call of Duty installment set to hit stores in early November. Those releases might not produce as much growth as Take Two is targeting, but they're likely to keep the company firmly in the lead on player engagement and audience size -- while Take Two does its best to close the wide gap between itself and its steadier, more profitable rival.