Despite Roblox (RBLX 1.78%) and Nintendo (NTDOY -0.74%) each being a leader in the video gaming industry today, both operate very different business models. While Nintendo builds complete systems on its own from hardware to software, Roblox capitalizes on the creativity of others. 

Although Roblox and Nintendo are each attacking the gaming market from a different angle, both have found success thanks to their unique strategies. But past success doesn't guarantee future returns. Let's see which stock is poised for a brighter future from here. 

What Roblox has going for it

Unlike Nintendo, Roblox is quite new to the public markets. Since its direct listing in March of 2021, the stock price has soared more than 30%. But Roblox doesn't operate quite like a traditional video game company.

Person playing video games on a mobile device.

Image source: Getty Images.

Home to roughly 42 million daily active users (DAUs), Roblox is an online world that is broken up into millions of different "experiences" built by independent creators, using the company's software tools. Users can choose from these experiences and enjoy them simultaneously with others. This is what the Roblox management team calls the "co-experience."

Naturally, this strategy thrived during the pandemic as people's longing for communication and socializing with friends had to be fulfilled digitally. The results reflected this as well, with the daily active user count growing by 85% from the end of 2019 to the end of 2020.  

But it's not just the widespread adoption that has investors excited. The financial results become more and more attractive as Roblox reaches greater levels of scale. Since the content in the game is user-generated, the larger the customer base grows, the greater incentive there is for creators to build games on the platform. This, in turn, improves the user experience, ultimately attracting more users. 

This wonderful cycle led to Roblox generating $1.9 billion in bookings (total amount of revenue expected to be recognized over a user's lifetime) in 2020 -- up 171% from the year prior.

What Nintendo has going for it

Though Nintendo might not be quite as young and exciting as Roblox, the company has been able to call itself home to the best-selling video game console globally for each of the last three years. Since launching the Switch platform in 2017, Nintendo has sold roughly 85 million hardware units. 

This huge customer base that Nintendo has been able to amass has subsequently led to much greater profits for the company as well. Since the company makes money not only by selling hardware but also by selling games, having a larger base to sell to means that game development is more lucrative. In fact, in the fiscal year 2020, Nintendo generated almost $5.9 billion in operating profits -- a 156% increase from two years prior. Meanwhile, operating margin (operating profit as a percentage of revenue) has grown from 20.8% to 36.4% during the same time period.

However, despite showing continued growth and improved profitability, some investors remain skeptical of the company's future. Nintendo currently trades at an enterprise value (market cap minus net cash) to operating income ratio of less than 10 -- well below the current market-wide average of 24.5. While it's impossible to know exactly why it gets this steep discount, investors might be worried about cyclicality. 

Throughout the company's history, Nintendo has seen a series of boom and bust cycles driven by the success of its gaming consoles. Most recently with the Wii and WiiU. However, the company appears to have learned from its mistakes. Unlike with previous console cycles, users now have a Nintendo account that is not tied to a specific piece of hardware. This means that as users purchase newer versions of the Switch, they can still access their digital games or downloaded data, which should make the upgrade cycle seamless for users and the financials less volatile for Nintendo.

Which is the better buy?

Though both companies have shown nothing but strong growth lately, and both still appear to have promising futures ahead, Nintendo's stock valuation appears to be much more favorable. While it's difficult to assess comparable valuations with a single metric, here's a look at both stocks side-by-side.

Metric Nintendo Roblox
Market cap $73 billion $52 billion
Price-to-sales ratio 4.6 45.3
Price-to-gross-profit ratio 8.3 61
Price-to-free-cash-flow ratio 13.4 98.7
Net cash $15.7 billion $1.4 billion

Source: Koyfin. Table by the author.

Although this table makes Roblox appear richly valued, it's worth bearing in mind that the company is new and thus growing much faster. It could very well grow into its current inflated valuations if all goes well. However, if we are judging the better buy here, thanks to Nintendo's fast-selling hardware and software, its massive cash balance, timeless intellectual property, and cheaper valuation, I'd have to give the edge to Nintendo.