Over the past several years, the gaming industry has enjoyed some notable moves. In 2014, Amazon acquired video game livestreaming company Twitch Interactive for nearly $1 billion. More recently, Microsoft has gotten the green light to acquire gaming giant Activision Blizzard after a long battle with the Federal Trade Commission (FTC) over antitrust concerns.
With Microsoft's deal dominating the headlines when it comes to deal activity in the gaming arena, other investment opportunities in the space seem to be overshadowed. Electronic Arts (EA 0.46%) and Take-Two Interactive Software (TTWO 0.72%) both present compelling investment opportunities. Both of these stocks could be worth putting on your radar if you are looking for exposure to high-growth companies with generous shareholder returns.
Electronic Arts: Slow and steady wins the race
Electronic Arts is a staple in the video game world. The company is the home to well-known gaming franchises such as Madden and The Sims. For its fiscal year ended March 31, Electronic Arts posted total revenue of $7.4 billion, an increase of 7% year over year.
Although 7% top-line growth might seem mundane, Electronic Arts's CEO, Andrew Wilson, noted during the earnings call that consumer softness is merely a product of the current uncertainty of the macroeconomic environment. Yet despite this softness, Wilson stated that during these cloudy times, people tend to flock to bigger, well-known brands, which actually helps Electronic Arts in the long run.
Another impressive feature of Electronic Arts' business is its profitability profile. For the year ended March 31, the company reported earnings per share (EPS) of $2.88 and a whopping $1.6 billion in operating cash flow. Furthermore, investors should know that Electronic Arts repurchased $1.3 billion of stock during the fiscal year, and announced a quarterly cash dividend during the earnings call. The combination of positive cash flow, GAAP profitability, and dividends certainly shines a good light on Electronic Arts.
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Take-Two Interactive: Don't miss the forest for the trees
On the other end of the gaming spectrum is growth stock Take-Two Interactive. For the fiscal year ended March 31, Take-Two Interactive posted total revenue of $5.4 billion, an increase of 53% year over year.
Unlike its more mature counterpart, Take-Two Interactive is still far away from profitability. For the year ended March 31, the company posted a net loss of $1.1 billion, thanks in large part to growing software development costs, royalties, and a large marketing budget.
Perhaps the most important intel was disclosed during Take-Two's earnings call. Management revealed that it expects the company to generate between $5.45 billion and $5.55 billion in net bookings in fiscal 2024. Given net bookings of $5.3 billion during fiscal 2023, this guidance does not come across as particularly bullish.
Similar to Electronic Arts, Take-Two's management attributed slower near-term growth to protracted consumer spending behavior, as well as lengthening development timelines for some releases. However, it was management's outlook for fiscal 2025 that really stuck out and should be of note.
Remember to think long-term
Take-Two Interactive stock is up 45% year to date. With so much momentum behind it, it's hard to fathom how much more the stock can carry. But keep in mind that despite this performance, the stock is still down nearly 30% from all-time highs in January 2021.
During the earnings call, Take-Two's management pointed to fiscal 2025, calling it a "new era" for the business, fueled by several new titles in its library and $8 billion of net bookings. This level of growth should not be discounted by investors. While fiscal 2024 may serve as a development year for the company, the stock's biggest gains may be yet to be seen and could be right around the corner, making now an opportune time to buy some shares.
For Electronic Arts, it's important to keep in mind that the company could very well be an acquisition target, given Microsoft's deal for Activision Blizzard. Microsoft clearly wanted to add more content to its existing gaming ecosystem, given the nearly 46% premium it paid over Activision's stock at the original announcement of the deal, and it wouldn't be surprising if another Big Tech rival followed its lead.
Nonetheless, traditional valuation metrics such as price-to-earnings (P/E) and price-to-sales (P/S) should be analyzed when assessing Electronic Arts. As of the time of this article, EA trades for a 20 times forward P/E and 5 times P/S. By comparison, Take-Two trades at a forward P/E of 47 and at 4.5 times sales. Given its consistent revenue growth, profitability, strong cash flow, and dividend, Electronic Arts appears to be a compelling video game stock at its current level.
