Activision Blizzard (NASDAQ:ATVI) and Electronics Arts (NASDAQ:EA) each enjoy premium positions in the attractive video game industry. Sure, their portfolios are vastly different, with EA focusing more on sports franchises, for example. But both companies are driving -- and benefiting from -- favorable industry trends like esports and the shift toward a subscription-based payment model for games.
Those similarities have kept their stocks roughly tracking each other lately, yet Activision has pulled far ahead in recent weeks. Let's take a look at why investors are betting that the gaming leader will have a better 2018 holiday season than its biggest peer.
Recent earnings reports from both companies have illustrated the powerful impact of increased digital spending and the rising popularity of gaming in general. EA said in late July that digital bookings jumped 13% in the fiscal first quarter, thanks in part to a surging user base for the latest release in The Sims franchise. The tilt toward more profitable subscription services, meanwhile, has helped push margins higher while lifting annual operating cash flow to over $1.8 billion, up from $1.5 billion two years ago.
Activision just celebrated booking over $1 billion of in-game spending for the second straight quarter with help from expansions in both the Call of Duty and Destiny franchises. The developer also revealed that engagement levels were strong, as players spent an average of 50 minutes per day interacting with its brands.
Both management teams stressed the importance of the second half of the calendar year that forms the launchpad for many of the company's biggest releases of 2018. And that's where Activision appears to have stepped ahead of EA as we enter the peak selling season.
Executing and adapting
Since their quarterly reports in late July, EA was forced to delay the launch of Battlefield V, one of its biggest releases of the year, by four weeks. It will now debut in late November. Activision Blizzard's comparable Call of Duty: Black Ops 4 title, meanwhile, is right on track for an Oct. 12 launch. That means the company will face a less competitive first-person-shooter niche for five critical weeks leading up to Black Friday.
Activision has also demonstrated its development flexibility by making an aggressive push into the battle royale playing mode that's made Fortnite such a big hit this year. The "Blackout" mode for the new Call of Duty game is off to a strong start in early testing by players. The company could also use its growing esports platform to make this approach even more of an engagement boost, and ultimately more profitable.
It's important to note that EA's earnings power isn't at risk, as the company still expects to book most of its expected Battlefield V revenue, but just in later quarters. The company suffered from a disappointing release for its Battlefront game last year, after all, but still managed to post solid sales and profit gains.
Still, investors have good reasons to give Activision shares a higher premium than EA's lately. The video game developer more consistently executes around its core franchise while taking the necessary risks to extend into new playing modes, new niches, and new geographies. As long as it keeps delivering the experiences that gamers crave, that powerful mix of strong execution and quick adaptability should help it continue to outperform rivals -- including EA -- over the long term.