Better Buy: Electronic Arts vs. Take-Two Interactive

Both gaming companies fell on fears over free-to-play content like Fortnite.

Nicholas Rossolillo
Nicholas Rossolillo
Feb 15, 2019 at 9:19PM
Technology and Telecom

Shares of Electronic Arts (NASDAQ:EA) and Take-Two Interactive Software (NASDAQ:TTWO) both got initially clobbered after reporting fiscal 2019 third-quarter results -- though Electronic Arts has since rebounded. The problem? Investors were worried that free-to-play options like the game Fortnite will become a persistent problem for the video game creators.

However, after both tumbled by double digits off last year's high-water marks, one of these stocks is a pretty good buy. Below, we'll take a look at how the companies have done nine months into their respective fiscal years, along with which stock I think it the smarter pick right now.

First Nine Months Fiscal Year 2019

Electronic Arts 

Change (YOY)

Take-Two Interactive 

Change (YOY)

Revenue

$3.71 billion

4%

$2.13 billion

58%

Earnings per share

$2.64

89%

$2.41

226%

Trailing 12-month P/E

18.4

N/A

30.0

N/A

Forward 12-month P/E

21.4

N/A

20.0

N/A

Data sources: Electronic Arts, Take-Two Interactive, and YCharts. YOY = year over year; P/E = price to earnings.

Pulling back the curtain on weak game sales

When EA reported its worse-than-expected holiday-season results, it gave investors more color than usual on the individual performance of its marquee games. The much-anticipated shooter Battlefield V sold 7.3 million copies, about a million shy of management's expectations. Part of the weakness was a late launch date, but the game also lacked a multiplayer battle royale mode (like Fortnite). Planned subsequent updates could mitigate the problem, but it was nevertheless a disappointing shortfall.

The same goes for the other major releases, Command & Conquer: Rivals and the popular recurring soccer title FIFA 2019. The soft release of Command & Conquer has had a slow new-player adoption rate, and converting players to the latest FIFA update has also been sluggish -- in part because last year was a World Cup year and the game had a record number of players. It all added up to a downgrade on the 2019 fiscal year, with revenue now expected to be $4.875 billion compared with prior guidance of $5.15 billion. Full-year net bookings (which include products and upgrades sold via digital channels) should now be $4.75 billion, compared with previous guidance for $5.2 billion.

The good news is that EA has a solid slate of releases coming up. A battle royale free-to-play game in the Titanfall series just released and is off to a solid start, and Star Wars Jedi: Fallen Order will also launch during the next fiscal year. That game could especially help, as the Star Wars franchise will be getting the final installment in the Skywalker story arc when Star Wars: Episode IX hits theaters in December 2019. In short, investors should expect profits to be down slightly in the near term, but rebound later in 2019.

A group of young men playing video games

Image source: Getty Images.

Throwing shade at quarterly results

Take-Two fared much better than EA did during the 2018 holidays, thanks in large part to the blockbuster sequel Red Dead Redemption 2. Sales and earnings were up big as the game set opening records, selling $725 million in its first three days alone. NBA 2K19 also did well as the 2018-2019 professional basketball season got underway during the quarter.

The video game maker even upgraded its outlook for the 2019 fiscal year, calling for $2.66 billion to $2.71 billion in revenue (compared with $2.55 billion to $2.65 billion before) and earnings per share of $3.07 to $3.18 (versus $1.73 to $1.98 before). If those numbers come to pass, it would be at least a 48% annualized increase in sales and at least a 99% increase in earnings per share. That's a fantastic year by any standard, but shares fell by double digits anyway.

The reason is that the upgraded guidance still fell short of what Wall Street analysts were hoping for. Though Take-Two's management did not mention Fortnite as a concern, EA's lackluster results likely dragged down Take-Two as well, as investors anticipate more modest growth with all of the free-to-play content out there. Growth is growth, though, and Take-Two expects Red Dead Redemption and online features of its other titles to carry its momentum well into 2019.

Check out the latest earnings call transcripts for Electronic Arts and Take-Two.

The better buy is...

After Take-Two's recent tumble and EA's rebound, Take-Two is the cheaper stock based on the current 2019 outlook. The company is also anticipating strong annualized growth, while EA is struggling with a weak near-term pipeline of games, and attributing some of its struggles to a competitive video game landscape.

Thus, Take-Two stock looks like a good growth-at-a-value play right now. EA isn't too shabby either, especially with some potentially strong game releases (like Star Wars) in the works later in the year, but it could have a bumpy road between then and now.