Activision Blizzard (NASDAQ:ATVI) and Microsoft (NASDAQ:MSFT) have both seen their share prices soar in 2020. More people are playing games and working from home, which is driving higher demand for these companies' products and services.

Here's a review of both companies to determine which stock is most likely to outperform from here.

A woman sitting on the floor and holding a red video game controller

Image source: Getty Images.

Activision Blizzard has millions of new players to monetize

While Activision Blizzard is not as dominant in the world of video games as Microsoft is in software, it makes some of the most popular games in the industry, averaging 407 million monthly active users in the first quarter. Activision Blizzard significantly beat its own outlook for revenue and earnings per share in the first quarter, thanks to strong player engagement in top franchises like Call of Duty and World of Warcraft. Activision Blizzard expects to deliver full-year net bookings growth of 8% and non-GAAP earnings per share growth of 13.4% over 2019. 

The pandemic hasn't slowed down the pace of game development. During the first-quarter conference call, CEO Bobby Kotick said, "As of now, we're on track to deliver compelling new content, including the World of Warcraft: Shadowlands expansion and the next premium Call of Duty release, both of which are planned for the second half of the year." 

The premium Call of Duty release refers to the version that is released every year for console and PC, and retails at the typical new release price of $60. But recently, Activision Blizzard has been successful complementing its premium Call of Duty release with free-to-play versions on mobile (Call of Duty: Mobile) and PC and console (Call of Duty: Warzone). These new free versions have brought in millions of new players to the franchise and should lead to plenty of opportunities to monetize this larger player base with additional content.

Looking beyond the near term, Activision Blizzard officially unveiled Overwatch 2 and Diablo 4 last fall and these new games will likely be released within the next few years. The first Overwatch reached 50 million players within four years of launch, and the Diablo franchise hasn't seen a new release on PC since 2012, so there should be plenty of pent-up demand for both titles.

In the meantime, Diablo: Immortal is expected to launch soon on mobile. Immortal is being developed in partnership with NetEase, and adds another major title to Activision Blizzard's arsenal to further penetrate the $77 billion mobile game market. 

The cloud is fueling Microsoft's growth

Microsoft got a boost last quarter, including spikes in usage across Microsoft Teams, Surface, and Xbox gaming. Surface revenue jumped 30% year over year in constant currency, and Xbox content and services revenue increased by 68% in constant currency. 

There was also a notable increase in Office 365 subscriptions, but weakness from small and medium-sized businesses pressured sales of Windows products with original equipment manufacturers. But overall, Microsoft finished fiscal 2020 in June on a high note. Revenue and adjusted earnings increased by 14% and 21%, respectively, for the year.

The primary reason Microsoft stock has soared 177% over the past three years is the robust growth happening with cloud services, specifically Microsoft Azure. Revenue from the "intelligent cloud" segment increased by 19% in constant currency last quarter, driven by a 50% increase from Azure. Microsoft is gaining the business of top consumer brands and organizations around the world that are turning to the cloud to host applications and process data using artificial intelligence.    

Investors should also keep an eye on Microsoft's gaming business. Although Xbox gaming contributes a small percentage of Microsoft's total revenue, the new console cycle kicking off this fall with the launch of the Xbox Series X and Sony's PlayStation 5 represents another opportunity for the software giant to extend its cloud services further in the world of gaming. Xbox Game Pass has seen record subscriber growth, and Microsoft's new xCloud gaming service is now live in 15 countries. 

It's all about the cloud at Microsoft. CEO Satya Nadella has masterfully positioned Microsoft for long-term growth in cloud computing. Given the increasing amounts of money that corporations and consumers continue to spend on cloud services, Microsoft is a safe tech stock to bet on with plenty of growth potential.

Which is the better buy?

I own shares of both stocks and believe both are fine investments at  current price levels. Activision Blizzard is a leader in a growing video game industry, and Microsoft is a leader in cloud computing and software. I don't think you can go wrong with either one. But if I had to choose only one to buy today, I would select Microsoft for a few reasons.

First, Microsoft has grown revenue and free cash flow faster over the last five years. 

ATVI Revenue (TTM) Chart

ATVI Revenue (TTM) data by YCharts

Additionally, Microsoft stock is cheaper than Activision Blizzard's across a range of valuation metrics. 

ATVI PE Ratio (Forward) Chart

ATVI PE Ratio (Forward) data by YCharts

Microsoft also offers a dividend yield of 0.98%, while distributing a third of its free cash flow in dividends. Activision Blizzard stock has a yield of 0.51%, while distributing 20% of its free cash flow in dividends. 

Across growth, valuation, and dividends, and the current momentum in cloud services, Microsoft is the better buy.