Activision Blizzard (ATVI +0.00%) and Microsoft (MSFT 1.40%) have delivered market-beating gains for investors. Activision Blizzard is currently enjoying strong momentum in its Call of Duty franchise and could see further growth in monthly active users from its push into mobile. While Microsoft is gearing up to launch the Xbox Series X this holiday, the software giant is reaping the rewards of a growing demand for cloud services across the consumer and enterprise markets.
Let's find out which of these tech stocks stands the best chance of outperforming from here.
Image source: Getty Images.
Which company is growing faster?
When looking at recent growth trends in revenue, operating income, and free cash flow, Microsoft has performed better than Activision over the last five years. And this is with the benefit of Activision's $5.9 billion acquisition of King Digital Entertainment in 2016.
ATVI Revenue (TTM) data by YCharts
It's to Microsoft's credit that it has delivered more growth primarily by sticking to its own guns. It has successfully transitioned its core productivity software into a cloud subscription service (Microsoft 365) and is experiencing robust growth in enterprise cloud solutions with Microsoft Azure.
Moreover, it's impressive that Microsoft is still growing this fast despite producing a massive $147 billion in revenue over the last four quarters. In contrast, Activision Blizzard expects to generate $7.6 billion in net bookings (a non-GAAP measure of revenue) in 2020.
However, Activision could see its growth accelerate over the next five years. Activision's current outlook for 2020 would translate to a 19% increase in total bookings. Adjusted earnings are expected to grow faster at 24% year over year.
On the other side, analysts currently expect Microsoft to grow revenue and earnings per share by 9.7% and 11.9%, respectively, in fiscal 2021 (which ends in June).
Looking further out, analysts expect Activision to grow earnings by 24% per year over the next five years, whereas Microsoft's earnings are expected to grow by 15% per year.
What is driving Activision performance?
Microsoft has clearly been the better growth stock over the last five years, delivering a return of 289% compared to Activision's 131%. But Activision has trounced Microsoft's return going back further. Over the last 20 years, Activision Blizzard has had the benefit of growing from a small game developer to one of the leading game companies in the world, leading to a market-smashing return of more than 6,000%.
Activision currently has more than 400 million active players across its games, which include Overwatch, World of Warcraft, and the Candy Crush mobile franchise.
As its 2020 outlook reveals, Activision Blizzard is very capable of turning on the afterburners. It has historically relied almost exclusively on making games for console and PC platforms to grow its business, but mobile games represent a huge opportunity. Last fall, Activision got the ball rolling with the launch of Call of Duty: Mobile, which contributed to a 31% year-over-year increase in monthly active users in the second quarter, representing an additional 101 million players.
After weak player engagement trends in 2018, Activision made adjustments to its Call of Duty franchise last year. It followed up the mobile version with strong sales of Call of Duty: Modern Warfare, which got a subsequent boost earlier this year from players coming over from the free-to-play version Call of Duty: Warzone.
What is driving Microsoft's momentum?
Microsoft continues to win the business of organizations around the world that are going through a digital transformation. Microsoft expects 50 billion devices to come online by 2030, and that will create more growth in data usage, fueling demand for cloud services.
Microsoft Azure continues to report strong growth, with revenue up 48% in the fiscal first quarter of 2021, but it is decelerating after growing 56% in fiscal 2020. Microsoft claims it has more data center regions than its competitors, and it continues to expand its footprint to new countries every quarter. Its market share in the cloud infrastructure market increased to 18% during the second quarter, up from 16% a year ago, according to Synergy Research.
Cloud gaming also presents an opportunity for the software giant, where it's starting to adapt its cloud strategy with its Xbox Game Pass subscription service. However, gaming makes up less than 10% of Microsoft's business.
The Intelligent Cloud segment is Microsoft's largest business segment and should continue to grow. Although growth in cloud spending is gradually slowing, Synergy Research expects it to climb by more than 30% in 2020. Further growth in Microsoft's cloud business should pad the bottom line, given that the growth in the Intelligent Cloud segment has coincided with an increase in Microsoft's operating margin over the last five years.
MSFT Operating Margin (TTM) data by YCharts
Which is the better buy?
Microsoft has been more consistent, but Activision Blizzard is going through an acceleration in growth after releasing the trio of Call of Duty titles over the last year. Activision seems to have found a winning formula with mobile and free-to-play titles that could translate to success for other titles, fueling a strong decade of growth for the game maker.
Most importantly, Activision trades at a lower valuation than Microsoft, especially when factoring in forward earnings estimates.
| Metric | Activision Blizzard | Microsoft |
|---|---|---|
| Trailing P/E | 33.91 | 33.06 |
| Forward P/E | 24.24 | 30.54 |
| P/Sales | 8.79 | 10.66 |
| P/Free cash flow | 30.1 | 31.86 |
Data source: YCharts. P/E = price-to-earnings.
Activision Blizzard has a ton of room to grow in the $150 billion video game industry, which grew 13%, on average, between 2016 and 2019. That's a nice tailwind that gives Activision Blizzard a good chance to outperform Microsoft going forward, especially given the stock's lower forward P/E.
I own shares of both stocks, but I would be more eager to add shares of Activision Blizzard at current price levels.
