Despite the recent hiccup in China's gaming market (the largest video game market in the world), sales of games are expected to grow about 11% to reach $150 billion this year, according to market researcher Newzoo.

Both Take-Two Interactive (TTWO 0.79%) and Glu Mobile (GLUU) experienced robust revenue growth in 2018. Take-Two reported strong operating performance after the blockbuster launch of Red Dead Redemption 2 last fall.

Meanwhile, Glu Mobile seems to have found the right formula with its mobile games to keep players engaged and spending money on in-game updates. Over the last year, Glu Mobile's improved performance sent the stock price up 147%. Meanwhile, shares of Take-Two are down 18%. 

But which stock should investors buy today? Let's review the case for both companies to find out. 

A pair of men's hands holding video game controllers.

Image source: Getty Images.

The case for Take-Two

Take-Two delivered a solid performance last quarter, thanks to the phenomenal success of Red Dead Redemption 2, which has sold 23 million copies. Strong sales of RDR2 and other titles, including NBA 2K19 and Grand Theft Auto Online, contributed to robust growth of 140% in net bookings (a non-GAAP measure of revenue). 

Take-Two's mobile game unit Social Point contributed to recent results as well. Take-Two doesn't disclose specific figures for Social Point. However, between 2013 and 2016, Social Point grew revenue at a compound annual rate of 29% per year and reported $19.9 million in operating earnings (or EBITDA) the year before it was acquired. Social Point is small but is likely still growing fast, given the growth of the mobile game market.

Analysts currently have low expectations for Take-Two. Wall Street analysts forecast revenue to decline by 5.4% in fiscal 2020 (which ends in March) to $2.78 billion. However, I would take those estimates lightly at this point. Management raised its guidance for the fourth quarter based on stronger-than-expected sales of RDR2. The company launched the online multiplayer component of the game in November, and the player response has been strong. With ongoing content updates planned for both Red Dead Online and Grand Theft Auto Online, management believes they are positioned to grow player engagement over both the short and long term, which bodes well for future revenue growth. 

Additionally, Take-Two has a pipeline of games coming out through 2020 that should pad the company's results. Take-Two ended the recent quarter with $1.6 billion in cash on the balance sheet and no debt. The company is on pace to generate $680 million in adjusted free cash flow for fiscal 2019. All in all, management has ample resources for game development, share repurchases, and possible acquisitions to grow the company. 

Check out the latest earnings call transcripts for Take-Two Interactive and Glu Mobile.

The case for Glu Mobile

The pure-play mobile game maker is looking good, too. Glu Mobile had a record fourth quarter with bookings up 20% year over year. What's more, the company is finally starting to show a profit after years of reported operating losses. Glu generated $17 million in free cash flow last year and management believes it is just getting started. 

The mobile gaming market is full of growth opportunities but is very competitive. A very high percentage of mobile games are not profitable. However, Glu Mobile seems to have hit the right combination of games and a steady cadence of content updates. 

Consistent in-game updates are the name of the game in mobile. Players expect to download a game that gets routinely updated with fresh content. However, to continuously update a game a company needs resources, especially a talented development staff. For example, Activision Blizzard recently hit a rough patch due to weak in-game spending. As a result, management announced a restructuring of its business to hire more development staff after some of its games were losing players. 

It's for these reasons why Glu's recent performance and outlook are so impressive. Most of its revenue comes from three games: Design Home, Covet Fashion, and Tap Sports Baseball. Glu Mobile generated solid top-line growth last year without any new game releases. This reflects the strong performance of in-game updates to keep players engaged and spending money.

During the fourth-quarter conference call, CFO Eric Ludwig said, "Looking forward to 2019, we believe that the business scales to the next level." This is because they have a clear road map for further add-on content updates, as well as a new round of games that management is excited about, especially one in partnership with Disney. Bookings are expected to increase to a range between $435 million and $445 million, up 14% over 2018 at the midpoint of guidance. 

Also, management expects to end 2019 with $150 million in cash on the balance sheet, up from $80 million at the end of 2018, reflecting higher free cash flow generation later in the year.

Which is the better buy?

Before the verdict, we need to check each stock's valuation. Here's how both stocks stack up:

Metric Take-Two Interactive  Glu Mobile
Market cap $8.95 billion $1.26 billion
Trailing P/E ratio 26.55 N/A
Forward P/E ratio 16.96 17.66
PEG ratio 0.79 1.73
Price-to-sales ratio 3.47 3.45
Price-to-free-cash-flow ratio 20.56 72.8

Data sources: YCharts and Yahoo! Finance.  

Overall, Take-Two wins on valuation. Plus, it's expected to deliver faster earnings growth going forward. Analysts expect Take-Two to grow earnings 23% per year over the next five years, which reflects the enhanced monetization opportunities Take-Two has now that RDR2 is out and selling millions of copies. On the other side, Glu's earnings are expected to increase at a 15% annual rate. 

Given those estimates, investors get a much better deal with Take-Two. The Grand Theft Auto maker is a better value on every measure except its price-to-sales ratio.

I think Glu Mobile has hit a stride that will make it a video game stock worth considering in the future, but right now, I'm going to stick with Take-Two as the better buy.