Amazon (AMZN -1.11%) and Activision Blizzard (ATVI) have both benefited from the stay-at-home economy, though in different ways. Consumers turned to Amazon for everything from toilet paper to streaming content, while Activision's games provided a source of entertainment and social interaction during an isolating time.
Not surprisingly, the prices for both stocks have performed well over the past year, with Amazon jumping 53% and Activision rising 62%. But which is the better buy today?
Amazon
Amazon is one of the largest, most valuable brands in the world. Its online marketplace is the most visited site on the internet. And according to eMarketer, the company now facilitates an astonishing 39% of digital commerce in the United States, far ahead of second-place Walmart with 5.8%. And while Walmart is still the world's largest retailer, Amazon is closing in on that title, too.
Image source: Getty Images.
If there was a dark spot in Amazon's performance this year, it was the company's cloud computing business, Amazon Web Services (AWS). Revenue growth in this segment continued to decelerate, dropping from 37% in 2019 to 30% in 2020. On the bright side, the operating margin for AWS reached 29.8%, which is 3.6 percentage points higher than in 2019. Moreover, the company is still the clear leader in the cloud infrastructure space with a 32% market share, though Microsoft Azure is gaining ground.
Even so, the company's growth in e-commerce helped pick up the slack. Revenue from Amazon's own online sales and third-party merchants accelerated to 40% and 50%, respectively. Even more encouraging, Amazon posted positive operating income in its international business last year. The company has invested heavily in expanding its operations beyond the United States, and this is the first time since 2011 that Amazon's international segment has been profitable. If the company can maintain that momentum, it could help Amazon capture more of the massive global e-commerce market.
Over the last three years, the company's solid execution has translated into strong revenue growth and operating margin expansion.
|
Metric |
2017 |
2020 |
Change |
|---|---|---|---|
|
Revenue |
$178 billion |
$386 billion |
117% |
|
Operating Margin |
2.3% |
5.9% |
3.6% |
Source: Amazon SEC Filings.
Amazon's consistently strong overall growth -- despite being a $1.6 trillion company -- is one of the most amazing things about this tech giant. And it's not just the top line that's getting bigger. Amazon is also becoming more profitable. Free cash flow (FCF) per share has grown at 29% per year over the last five years, and while growth has slowed recently, FCF per share still jumped 18% in 2020. Even more impressive, Amazon posted that figure despite incurring over $11.5 billion in additional operational expenses due to COVID-19. In other words, this is what Amazon can do with one hand tied behind its back.
Going forward, Amazon remains well-positioned to dominate the U.S. digital commerce and global cloud computing markets, but the company is also gaining ground in digital advertising. The takeaway? Investors still have a lot to be excited about with this company.
Activision Blizzard
Activision Blizzard is one of the largest video game companies in the United States, generating more revenue than rivals like Electronic Arts and Take-Two Interactive. The company is behind popular titles like World of Warcraft, Overwatch, Call of Duty, and Candy Crush.
In 2020, Activision benefited from pandemic-driven tailwinds, as social distancing measures left many gamers with more free time on their hands. Not surprisingly, consumers purchased more consoles and game titles and spent more time engaged in gameplay.
As a result, Activision's Call of Duty: Modern Warfare and Call of Duty: Black Ops Cold War were the two top-selling games in the U.S. last year. More impressively, Black Ops Cold War, which was released in November 2020, is already one of the top 20 selling games of all time, and it continues to top the monthly sales charts as of January 2021, according to the NPD group.
However, like many gaming companies, Activision's business has been somewhat cyclical in the past. For example, the company released fewer major titles in 2019 and sales dropped 13% compared to the prior year. Over the long term, this has resulted in muted revenue growth.
|
Metric |
2017 |
2020 |
Change |
|---|---|---|---|
|
Revenue |
$7.0 billion |
$8.1 billion |
16% |
Source: Activision Blizzard SEC Filings.
On the bright side, the company is trying to stabilize its sales. In March 2020, Activision launched Call of Duty: Warzone, the series' first-ever free-to-play installment for PC and consoles. The company hopes this will attract more gamers, which should translate into more in-game purchases. Based on the early results, the strategy seems to be working: Warzone brought over 60 million players to the platform in the first two months.
Investors should pay attention to Activision's top line in the coming quarters to see if free-to-play titles do indeed result in more consistency.
A final word
Activision Blizzard has a great collection of gaming titles and a great strategy for reenergizing its business, but the cyclicality of the gaming industry still results in fluctuations in monthly active users, making its top-line less stable than Amazon's. And even though Activision's sales returned to growth in 2020, Amazon's revenue still increased more quickly.
Moreover, Amazon is a market leader in two different high-growth industries, and the company's dominance within those industries is far beyond what Activision has achieved in gaming. That's why Amazon wins this better-buy investing contest.
