Nintendo (NTDOY -1.35%) and Activision Blizzard (ATVI -0.47%) are two of the most well-known video game publishers in the world.
Nintendo has sold market-leading gaming consoles for nearly four decades, and it owns iconic first-party franchises like Mario, Zelda, Animal Crossing, and Metroid. Activision Blizzard's various publishers produce hit gaming franchises like Call of Duty, Overwatch, World of Warcraft, Diablo, and Candy Crush.
Both stocks soared in 2020 as the coronavirus pandemic caused people to stay home and play more video games. However, tougher year-over-year comparisons this year as the market tries to move past the pandemic have caused investors to dump both stocks.
Nintendo's stock price has declined more than 25% this year, while Activision Blizzard's stock price has tumbled about 35%. Should investors consider buying either gaming stock right now as the bulls rotate toward other sectors?
Nintendo faces a slowdown
Nintendo's revenue rose 34% in fiscal 2020, which ended this March, as its net profit surged 86%. Its shipments of Switch consoles and software both increased 37% for the full fiscal year.
Nintendo's cheaper Switch Lite console attracted more gamers throughout the pandemic, and it sold more copies of popular games like Animal Crossing: New Horizons, Mario Kart 8 Deluxe, Ring Fit Adventure, Super Mario 3D All-Stars, and Super Mario 3D World + Bowser's Fury.
But this fiscal year, Nintendo expects its revenue and net profit to decline 9% and 27%, respectively, as it laps the pandemic's initial impact. Component shortages will also throttle the availability of Switch consoles just as it faces fresh competition from newer consoles like Sony's PS5 and Microsoft's Xbox Series S and X consoles.
Nintendo's near-term outlook is gloomy, but the new OLED version of the Switch, its recent launch of Metroid Dread, and a new DLC for Animal Crossing: New Horizons could help it tread water until next year.
Next year, Nintendo's prospects could improve as it launches eagerly anticipated games like its sequel to The Legend of Zelda: Breath of the Wild, Pokémon Legends: Arceus, and Splatoon 3. Analysts expect Nintendo's revenue and profits to stay nearly flat next year, but the stock's downside potential could be fairly limited at 15 times forward earnings.
Activision's problems run much deeper
Activision Blizzard's revenue and net income rose 25% and 46%, respectively, in 2020. It splits its business into three main publishers: Activision, King, and Blizzard.
Activision's evergreen Call of Duty franchise generated strong growth throughout the pandemic, while King's Candy Crush generated stable returns as people spent more time on their smartphones.
However, Blizzard was the weakest link as World of Warcraft, Overwatch, and Hearthstone attracted fewer players. Blizzard has also been at the center of a sexual discrimination and harassment lawsuit over the past five months, and those troubles caused it to delay two of its most eagerly anticipated sequels -- Overwatch 2 and Diablo 4 -- last month.
That escalating crisis, which has sparked calls for Activision Blizzard CEO Bobby Kotick to resign, could make it even more difficult for the company to continue growing as the pandemic-related tailwinds wane. It already expects its bookings to decline 9% year over year in the fourth quarter against a tough comparison to last year's holiday shopping season.
Nonetheless, analysts still expect Activision's revenue and earnings to rise 4% and 10%, respectively, this year. Next year, they expect its revenue to rise another 4% as its earnings stay roughly flat. Those growth rates are tepid, but its stock also looks cheap at 15 times forward earnings.
The winner: Nintendo
Nintendo's near-term outlook looks a lot weaker than Activision's, but two factors make it a better long-term investment.
First, Nintendo doesn't face a brand-tarnishing scandal like Activision, which could struggle to beat analysts' expectations this year if more employees resign and more gamers boycott its games.
Second, Nintendo could gain a lot more attention as a metaverse play. It's shipped nearly 100 million Switch consoles so far, its franchises are expanding into theme parks, stores, and movies, and Animal Crossing: New Horizons is already a "mini-metaverse" that enables its players to own homes, earn an in-game currency, and socialize with other players.
That expansion could lock more consumers into Nintendo's sprawling ecosystem, unlock fresh licensing opportunities, and generate a lot of excitement for its next major console launch. Therefore, Nintendo's cyclical recovery could make it a much stronger long-term play than Activision.