Activision Blizzard (ATVI) and NVIDIA (NVDA 1.64%) are both household names for most gamers. Activision is one of the world's top video game publishers, and NVIDIA is the leading producer of gaming GPUs.

Both companies generated robust growth throughout the pandemic as people stayed at home and played more games. NVIDIA's data center business, which sells high-end GPUs for complex AI and machine learning tasks, also flourished as online activities surged throughout the crisis.

Activision's stock rallied nearly 40% over the past 12 months, but NVIDIA's stock surged more than 80%. NVIDIA clearly generated more impressive returns throughout the pandemic, but will it remain a better investment as the market rotates toward value stocks and reopening plays?

A young man plays a PC game in a neon room.

Image source: Getty Images.

Activision's strengths outweigh its weaknesses

Activision Blizzard owns three core businesses -- Activision, which publishes the popular first-person shooter Call of Duty; Blizzard, which publishes Overwatch, Diablo, Hearthstone, and World of Warcraft; and King, the mobile game maker which is best known for Candy Crush.

Activision grew the fastest last year as its Call of Duty franchise gained more players across multiple platforms. King's growth spiked in the first half as Candy Crush gained more players, but Blizzard remained the weak link as its aging games lost their luster.

Activision's revenue and adjusted earnings per share (EPS) grew 25% and 39%, respectively, in fiscal 2020. It generated 82% of its revenue from its digital channels, which operate at much higher margins than traditional retail channels, compared to 76% of its revenue in 2019.

In the first quarter of 2021, Activision's revenue and adjusted EPS rose 27% and 29%, respectively. Call of Duty and Candy Crush remained strong, while new expansion packs for World of Warcraft and Hearthstone enabled Blizzard to tread water as it rolled out Diablo Immortal on mobile devices.

Like many other video game publishers, Activision is bracing for tough year-over-year comparisons against the pandemic's impact last year. Analysts expect its revenue and earnings to grow 5% and 9%, respectively, this year -- but its growth might accelerate next year as it launches new Call of Duty games and its long-awaited sequel to Overwatch.

Based on these facts, we can assume Activision Blizzard will keep expanding over the long term, and its stronger evergreen franchises will continue to offset the softness of its older titles.

NVIDIA continues to fire on all cylinders

NVIDIA's revenue and adjusted EPS rose 53% and 73%, respectively, in fiscal 2021 (which ended this January). That growth was attributed to three tailwinds: brisk sales of gaming GPUs as gamers upgraded their PCs to play higher-end games during the pandemic, robust demand for its data center GPUs to process the deluge of online data with AI algorithms, and its takeover of the data center equipment maker Mellanox last April.

Servers in a data center.

Image source: Getty Images.

The growth of those segments easily offset the weakness of its smaller automotive businesses, which suffered pandemic-related disruptions.

In the first quarter of fiscal 2022, NVIDIA's revenue and adjusted earnings rose 84% and 103% year over year, respectively. Its gaming revenue surged 106%, its data center revenue jumped 79%, and its automotive business stabilized as automakers started producing cars again.

Analysts expect NVIDIA's revenue and adjusted earnings to increase 46% and 55%, respectively, this year. Its growth will likely decelerate in fiscal 2023 after it fully laps its takeover of Mellanox.

However, analysts' forecasts don't include its attempted takeover of Arm Holdings, the world's largest mobile chip designer. That acquisition still faces several major hurdles, but it could significantly boost NVIDIA's revenue, support its margins with higher-margin royalties and licensing fees, and strengthen the foundations of its own Arm-based CPU business. Investors should also still keep an eye on the global chip shortage, which could create manufacturing bottlenecks for fabless chipmakers like NVIDIA.

The valuations and verdict

Activision trades at 22 times forward earnings, while NVIDIA has a higher forward P/E ratio of 38. Activision's stock looks cheaper, but it also faces plenty of competition in the crowded gaming market, constant pressure to release new hit games, and a more abrupt post-pandemic slowdown than NVIDIA.

NVIDIA's stock still looks reasonably valued relative to its growth. Its gaming and data center businesses have plenty of room to expand, and its interest in Arm suggests it wants to expand far beyond its core markets.

Based on these facts, I believe NVIDIA will outperform Activision for the rest of the year. Activision is still a solid long-term gaming investment, but it has far fewer near-term catalysts than NVIDIA.