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Electronic Arts Inc. (EA) and Take-Two Interactive Software, Inc. (OF THEM) are two established players in the video game industry. EA develops, publishes and distributes branded interactive entertainment software in various genres for video game consoles, PCs, handheld game players and cellular handsets worldwide. It also provides services related to online games. TTWO develops, publishes and distributes interactive entertainment software games and consoles worldwide. It delivers its products through physical retail, digital download, online platforms, and cloud streaming services.
While the limited outdoor entertainment options have led the video game industry to see an expanding user base and generate significant returns over the past year, increasing vaccination rates and decreasing cases of COVID-19 are paving the way for outdoor entertainment options for people. To maintain or grow this user base, companies in this space are developing new versions of their most popular games with better graphics, low latency, and quality. The global gaming market is expected to grow at a 13.2% CAGR to reach $ 545.98 billion by 2028. Thus, EA and TTWO are expected to benefit.
While TTWO has lost 10% in the past six months, EA has lost 5%. Which of these titles is the best choice now? Let’s find out.
Latest developments
On October 1, 2021, EA announced the launch of EA SPORTS FIFA 22, bringing revolutionary next-generation HyperMotion gaming technology to PlayStation5, Xbox Series X | S and Stadia. Given the game’s huge user base, the company believes this HyperMotion tech offering won’t revolutionize the FIFA franchise, but it will also change the landscape of sports video games forever.
On September 10, 2021, 2K video game publisher TTWO announced the availability of NBA 2K22 on current and next-gen platforms worldwide. NBA 2K22 offers the best visual and AI presentation of players, historical teams and diverse basketball experiences with online community features and deep and varied game modes. As people become more interested in basketball thanks to the growing popularity of the NBA and virtual experiences, the company expects an increasing demand for the game in the near term.
Recent financial results
EA’s net revenue for its first fiscal quarter ended June 30, 2021 increased 6.3% year-on-year to $ 1.55 billion. The company’s gross profit was $ 1.24 billion, a 5.6% year-over-year improvement. Its operating profit was $ 322 million, down 31.6% from the same period a year earlier. While its net income declined 44.1% year-over-year to $ 204 million, its EPS declined 43.2% to $ 0.71. The company had $ 4.01 billion in cash and cash equivalents as of June 30, 2021.
For its fiscal first quarter ended June 30, 2021, TTWO’s net sales decreased 2.2% year-on-year to $ 813.35 million. However, the company’s gross profit amounted to $ 483.63 million, up 36.4% from the prior year period. Its operating income was $ 170.47 million, representing a 107.5% year-over-year improvement. TTWO’s net income of $ 152.26 million for the quarter represents an increase of 72% over the prior year period. Its EPS rose 68.8% year-on-year to $ 1.30. The company had $ 1.40 billion in cash and cash equivalents as of June 30, 2021.
Past and expected financial performance
EA’s revenue and EBITDA grew at CAGRs of 5.8% and 1.3%, respectively, over the past three years. The company’s total assets have grown at a CAGR of 15.6% over the past three years.
Analysts expect EA’s EPS to grow 15.3% year-on-year in the current year and 11.9% next year. Its revenue is expected to grow 22.4% year-over-year in the current year and 6.5% next year. Analysts expect the stock’s EPS to grow at a rate of 26.3% per year over the next five years.
In comparison, TTWO’s revenue and EBITDA grew at CAGRs of 23.9% and 54.1%, respectively, over the past three years. The company’s total assets have grown at a CAGR of 22.3% over the past three years.
Analysts expect TTWO’s EPS to decline 30.9% year-on-year in the current year and increase 44.6% next year. Its turnover is expected to decline 4.4% this year and 17.6% next year. The stock’s EPS is expected to grow at a rate of 12.3% per year over the next five years.
Evaluation
In terms of a non-GAAP forward PEG, TTWO is currently trading at 3.57x, which is 158.7% higher than EA’s 1.38x. In terms of EV / futures sales, TTWO’s 21.75x is 45.5% higher than EA’s 14.95x.
Profitability
EA’s revenue over the past 12 months is almost 1.8 times the revenue generated by TTWO. EA is also more profitable, with a rate of 73.4% Gross margin against 59.5% for TTWO.
In addition, EA’s leveraged free cash margin of 24.5% compares favorably with TTWO’s 16.2%.
POWR odds
While TTWO has an overall rating of C which translates to Neutral in our property POWR odds system, EA has an overall rating of B, which is equivalent to Buy. POWR scores are calculated taking into account 118 different factors, each weighted to an optimal degree.
EA has a B rating for Sentiment, which is consistent with favorable analyst estimates. Analysts expect EA’s EPS to increase 15.3% year-on-year in the current year to $ 6.63. However, TTWO’s C rating for sentiment is in line with lower analysts’ expectations for its EPS. The company’s EPS is expected to fall 30.9% year-on-year to $ 4.55.
EA has a B grade for quality, which is consistent with its industry-superior profitability ratios. EA’s 12-month free cash flow margin of 24.5% is 114.2% higher than the industry average of 11.4%. However, TTWO’s C rating for quality is in line with its relatively lower profitability ratios. TTWO’s 12-month leveraged free cash margin of 16.2% is 41.8% higher than the industry average of 11.4%.
Of the 24 C-rated actions Entertainment – Toys and Video Games Industry, TTWO is ranked No.12, while EA is ranked No.6.
Beyond what we have stated above, our POWR rating system has also rated EA and TTWO for growth, value, momentum and stability. Get all TTWO assessments here. Also, Click here to view additional POWR ratings for EA.
The winner
The increased investment to deal with the semiconductor chip shortage and continued innovations should help the video game industry maintain steady growth despite a refocus on outdoor activities. Therefore, EA and TTWO should benefit. However, relatively higher profitability and lower valuation makes EA a better buy here.
Our research shows that the odds of success increase when betting on stocks with a strong buy or buy overall POWR rating. Click here to access the top rated stocks in the Entertainment – Toys and Video Games sector.
EA shares. Year-to-date, EA is down -6.30%, compared to a 17.46% increase in the benchmark S&P 500 over the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a particular interest in finding market inefficiencies. She is passionate about educating investors so that they can be successful on the stock market. Following…
