Tencent (OTC:TCEHY) and Take-Two Interactive (NASDAQ:TTWO) represent two very different ways to invest in video games.

Tencent, one of China's top tech companies, is the world's largest video game publisher. Its sprawling portfolio includes Honor of Kings, PUBG Mobile, League of Legends, and Clash of Clans; nearly half of Fortnite publisher Epic Games; and big stakes in Activision Blizzard, Ubisoft, and other companies.

Take-Two, which is based in New York, is much smaller than Tencent -- but it publishes popular franchises like Grand Theft Auto, Borderlands, Red Dead, Mafia, WWE 2K, and NBA 2K.

A father and mother play a video game with their son.

Image source: Getty Images.

Both stocks generated impressive gains over the past 12 months as video game sales soared throughout the pandemic. Tencent's stock rose nearly 60% as Take-Two's stock climbed nearly 50%.

But can Tencent and Take-Two maintain that momentum as the market rotates out of pandemic-driven stocks and into reopening plays in other sectors? Let's take a fresh look at both companies to find out.

The differences between Tencent and Take-Two

Tencent only generated 29% of its revenue from online games last quarter. The rest of its revenue came from its online advertising, social networking, and business and fintech services segments.

Those other businesses host additional services, including WeChat (China's top mobile messaging platform with over 1.2 billion monthly active users), its streaming media platforms, Tencent Cloud, and WeChat Pay, which shares a duopoly in China's online payments market with Ant Group's AliPay.

Take-Two operates a simpler business model that generates all its revenue from video games. It has two core studios, 2K and Rockstar. 2K develops its 2K sports games, Borderlands, Mafia, Civilization, and various other franchises. Rockstar created the Grand Theft Auto and Red Dead franchises.

Take-Two also owns two mobile publishers: Social Point, which develops games like Dragon City and Monster Legends, and PlayDots, which publishes the popular puzzle games Dots and Two Dots.

Which company is growing faster?

Tencent's revenue rose 28% to 482.1 billion yuan ($73.4 billion) in fiscal 2020, which aligns with the calendar year. Its adjusted net profit rose 30% to 122.7 billion yuan ($18.8 billion).

Tencent operates three main segments: VAS (valued-added services), which includes in-app transactions from its gaming, social networking, and media platforms; online advertising, which displays digital ads on those platforms; and fintech and business services, which include Tencent Cloud and WeChat Pay.

Tencent's VAS revenue rose 32% for the full year, its advertising revenue grew 20%, and its fintech and business services revenue increased 26%. The growth of its VAS business wasn't surprising, since people spent more time playing its games and making in-app transactions within WeChat's Mini Programs, but its rising ad revenue outpaced the growth of other major ad platforms like Baidu.

A young man plays a mobile game on a smartphone.

Image source: Getty Images.

Take-Two's revenue rose 9% year over year to $2.53 billion in the first nine months of fiscal 2021, which ended last December. It expects its net bookings -- which includes deferred revenue from digital purchases -- to increase 13%-14% for the full year.

Its top games are NBA 2K21, PGA Tour 2K21, Grand Theft Auto V, Red Dead Redemption 2, its remastered Mafia games, and Social Point's mobile games. Grand Theft Auto Online and Red Dead Online are also significantly extending the lifespans of the original games.

Take-Two's net income rose 31% year over year to $370 million during the first nine months, thanks to its growing dependence on higher-margin digital downloads, in-game transactions, and recurring revenues.

The forecasts and valuations

Analysts expect Tencent's revenue and earnings to rise 21% and 27%, respectively, this year, as the post-pandemic growth of its non-gaming segments offsets the slower growth of its gaming business -- which already experienced a significant slowdown in the fourth quarter of the year.

Those are impressive growth rates for a stock that trades at just 27 times forward earnings, but ongoing concerns about tighter antitrust regulations in China are holding back the stock. It doesn't face as many antitrust headwinds as Alibaba, but tighter regulations could still throttle its growth.

Wall Street expects Take-Two's revenue and earnings to both grow 15% this year. But for fiscal 2022, which started at the end of March, analysts expect its revenue and earnings to increase just 4% and 1%, respectively, as it faces slower growth in a post-pandemic market. Based on those estimates, Take-Two's stock looks a bit pricey at 29 times forward earnings.

The winner: Tencent

I recently told investors to avoid Tencent until the regulatory headwinds dissipate, and I stand by that opinion. But if I had to choose one of these stocks right now, I'd still buy Tencent because it generates stronger growth, owns a more diversified business, and trades at a lower P/E ratio than Take-Two.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.