Activision Blizzard (NASDAQ:ATVI) and Apple (NASDAQ:AAPL) have both delivered market-beating gains for investors over the past decade. While Activision Blizzard makes some of the most popular games in interactive entertainment, Apple is one of the most valuable brands in the world, with a massive user base that is increasingly spending money on apps and other services.
Let's compare both companies to determine which stock is the better buy.
The case for Activision Blizzard
One thing Activision Blizzard has in common with Apple is that it is focused on turning its product (games) into a service, much like Apple is pushing the people who own its devices to spend money on subscription services. For Activision, the benefit of this strategy is less dependence on releasing a new game and hoping that it will be a hit.
In the second quarter, Activision Blizzard's in-game spending comprised 66% of total net bookings. Players are spending more time with the same game for months at a time, and that plays into the hands of Activision with some of the top franchises in the video game industry.
Activision's top three titles are Call of Duty, World of Warcraft, and the mobile game Candy Crush, which collectively comprised two-thirds of total revenue last year. Recent momentum in the Call of Duty franchise has Activision Blizzard set to deliver strong operating results this year. Activision expects to deliver growth in net bookings and adjusted earnings of 19.4% and 24%, respectively.
An advantage for Activision is its wide audience reach, with more than 400 million monthly active users across all its franchises. Even though Call of Duty has been around for more than a decade, the recent free-to-play releases of Call of Duty: Mobile and Call of Duty: Warzone have further increased the franchise's momentum.
The new Call of Duty releases are largely responsible for the second quarter's year-over-year increase of 101 million monthly active users. Activision will certainly have a larger built-in audience for the next installment, Call of Duty: Black Ops Cold War, releasing this fall.
Over the next decade, Activision says it plans to use its recent success with Call of Duty as a playbook to invest more in the fast-growing mobile market with "mobile-first reimaginations" of some of its top console and PC titles.
The case for Apple
Apple could face strong demand for the new 5G iPhones, expected to be unveiled this fall. The iPhone still comprises around half of Apple's annual revenue, but sales have been sluggish in recent years. A slowing upgrade cycle is to blame, as users seem happy with older iPhones. However, the hype and marketing around 5G wireless capability could encourage more upgrades.
Management is not providing guidance due to the near-term uncertainty about COVID-19, but analysts expect Apple to report revenue and earnings growth of 4.9% and 9%, respectively, for the fiscal year just wrapping up. Looking ahead to next year, analysts forecast revenue growth of 13.2% and earnings growth of nearly 20% year over year.
Apple has the advantage of a ubiquitous brand. It has 1.5 billion active devices worldwide, and its installed base continued to hit new records in recent months. This is driving growth in subscriptions for Apple Music, iCloud, Apple News+, and other services. Apple just recently introduced Apple Fitness+ and unveiled a new bundled subscription plan that combines several of its most popular services into a single plan, which could encourage more sign-ups.
Apple's services segment made up 17.8% of total net sales in fiscal 2019. That percentage stood at 22% in the most recent quarter. The benefit of increasing services revenue is a potentially higher profit margin over time. Apple is already a cash machine, with $71 billion generated in free cash flow over the last four quarters. A higher percentage of revenue coming from services would enhance Apple's profitability.
Why I would buy Activision stock
Past performance gives an edge to Apple, given that its stock price, revenue, and free cash flow have climbed at a faster rate than Activision Blizzard's over the past three years. But investors should be aware of a few things that could make Activision a more timely buy at current price levels.
While Apple is growing the number of its devices people are using, Activision Blizzard could see its monthly active users grow by a higher percentage over the next decade as it invests more in free-to-play experiences, particularly on mobile devices. This would provide a larger base to monetize.
Plus, Activision Blizzard CEO Bobby Kotick has established a record of making game-changing acquisitions, including the 2008 merger with Blizzard Entertainment and the 2016 acquisition of King Digital Entertainment. He is incentivized to make another "transformative transaction" in his compensation package and another deal could significantly increase the intrinsic value of the business, as previous deals have done.
The pending releases of Overwatch 2, Diablo 4, the Diablo: Immortal mobile version, and other titles in the pipeline set Activision up for a bright future. Currently, the consensus analyst estimate forecasts Activision to grow earnings by 24% annualized over the next five years, compared to 12% for Apple.
Both stocks trade at about the same P/E: Activision is at 34.7, while Apple trades at 33 times earnings. I would buy Activision Blizzard at the current price level, given the higher growth expectations over the next five years.