The battle between Activision Blizzard (NASDAQ:ATVI) and Zynga (NASDAQ:ZNGA) is a story of an established player facing a competitive threat from an up-and-coming challenger. Activision Blizzard pioneered the gaming industry after its founders left Atari to become a separate game-oriented company. However, its dependence on console-focused games left a niche open for a company like Zynga, which took advantage of a new technology to form a mobile device-oriented gaming company.

The overall popularity of gaming should benefit both companies as Grand View Research forecasts a compound annual growth rate (CAGR) of 13% through 2027. However, one of these video game stocks will likely deliver higher returns than the other. Let's see if we can determine which is the better buy.

Three teens enjoying a mobile game while sitting on a bench outside.

Image source: Getty Images.

How do the companies compare?

Although both companies started from very different places, both have focused on expansion.

Capitalizing on its over 40 years in business, Activision built franchises such as Call of Duty that have long driven sales. It had also bought franchises, acquiring World of Warcraft when it purchased Blizzard. Blizzard later founded the Overwatch League, which helped to mainstream competitive gaming. It also took over the Candy Crush franchise when it bought King Digital, bringing Activision Blizzard into Zynga's niche, social and mobile gaming.

These three divisions claimed 435 million combined monthly active users (MAUs), more than the 407 million reported one year ago. Still, only the Activision division experienced an increase in MAUs over that time, claiming 150 million versus 102 million in the year-ago quarter.

Conversely, Zynga initially built its popularity through an alliance with Facebook. At this time, it established franchises such as Zynga Poker, Words With Friends, and Farmville that continue to bolster the company.

After Facebook ended the alliance in 2013, the company struggled until former Electronic Arts executive Frank Gibeau became CEO. Under Gibeau, Zynga has ventured into other gaming niches, entering the hypercasual gaming market through its acquisition of Rollic. It also facilitated cross-platform play by buying Echtra Games, which allows gameplay across multiple types of gaming systems.

Now, with the upcoming purchase of Chartboost, announced in March, it will combine its games with an advertising and monetization platform. Many believe this planned acquisition should boost growth. Chartboost claims 700 million users, a tremendous boost to Zynga, whose games attracted 164 million MAUs in the first quarter of 2021, a 22% increase from the 134 million claimed one year ago.

What about the financials?

Both continue to post impressive growth numbers. In Activision Blizzard's first quarter, revenue increased 27% from year-ago levels to $2.3 billion. Net income rose 23% over the same period to $619 million as rising game development expenses and general and administrative expenses cut into profits. For fiscal 2020, revenue surged 25% from 2019 levels to $8.1 billion. During that time, net income climbed 46% to $2.2 billion as operating expenses rose by only 10%.

Zynga experienced larger increases with first-quarter revenue of $680 million, growing 68% from year-ago levels. During that period, it cut losses 78% to $23 million as operating expenses increased by only 38%. Also, the company earned an additional $9 million in other income related to foreign exchange and asset-based gains.

For 2020, Zynga reported $2 billion in revenue, 49% higher than in 2019. It lost $429 million that year, a drop from 2019 when the company sidestepped a loss by bringing in $314 million from a building sale.

Activision Blizzard remains the larger company, supporting a market cap of $72 billion versus only about $11 billion for Zynga. Nonetheless, the smaller size has not always translated into faster stock price growth for Zynga. Indeed, over the last five years, Zynga has risen by about 270% versus Activision Blizzard's 123% price surge. Still, over the previous 12 months, Activision's stock increased by 15% compared to about 1% for Zynga.

ATVI Chart

ATVI data by YCharts

However, from a price-to-sales (P/S) ratio perspective, Activision is the more expensive stock. It sells for eight times sales versus the five P/S ratio for Zynga. Additionally, Zynga expects faster growth going forward. In fiscal 2021, Activision Blizzard predicts about $8.4 billion in revenue, a 3% increase from 2020. Conversely, Zynga forecasts revenue of $2.7 billion, which would amount to a 37% increase over that period.

Activision Blizzard or Zynga?

Under current market conditions, Zynga will likely deliver higher returns. Not only does the stock trade at a lower valuation, but it also produces faster revenue growth. Indeed, Zynga has still not reached profitability and its stock price growth over the last year has lagged. Nonetheless, its moves into cross-platform gaming and monetization efforts could prove lucrative over time. Although double-digit growth across the industry should also help Activision Blizzard, Zynga stock stands in a better position to deliver more substantial gains.

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.