Consider Electronic Arts Over Take Two Interactive As Demand For Gaming Increases?

The stock price for Electronic Arts (NASDAQ: EA) is down roughly 8.5% since May 31, 2018, as the company’s business in 2019 was impacted by lower user engagement. In comparison, Take Two Interactive (NASDAQ: TTWO), best known for its NBA2K franchise, has seen its stock grow by 25.4% during the same period. The difference in the stock price growth makes sense when we look at the top line growth of 72.3% for Take Two Interactive vs 7.5% for Electronic Arts. However, Electronic Arts’ margins are way ahead (55% vs 13%). Does that make sense? We don’t think it does, and we believe Electronic Arts is a good investment at the moment compared to Take Two Interactive, as investors seek to ride the rally in gaming stocks in the current COVID-19 crisis. Companies such as Electronic Arts and Take Two Interactive stand to benefit in the current crisis, as the demand for gaming is seeing traction, given that more people are confined to their homes, eschewing more public forms of entertainment. Our dashboard, ‘Electronic Arts vs. Take Two Interactive: Does The Stock Price Movement Make Sense?’, has the underlying numbers.

Take Two Interactive Has Seen Strong Top Line Growth But Electronic Arts Valuation Is Attractive

Let’s look at the core business prospects of both companies a little more closely. Electronic Arts is a large gaming company, with multiple popular franchises, including FIFA, Star Wars, Apex Legends, and NFL, under its portfolio. Despite strong franchises, the company’s valuation has dropped over the last few years, as the company saw a poor fiscal 2019, due to low user engagement for some of its games, including Battlefield. However, the company performed well in fiscal 2020 with 11% top line and >3x bottom line growth.

Take Two Interactive is a fast growing gaming company, with popular games such as Grand Theft Auto, NBA2K and Red Dead Redemption in its portfolio. Take Two Interactive’s growth over the last few years has largely been led by its increasing user engagement for its top games. In fact, the top 5 franchises, including the 3 mentioned above, account for close to 90% of the company’s total revenues. The company’s valuation has soared over the last few years, as investors sought the strong growth in its gaming franchises. There could be a couple of factors impacting Take Two Interactive’s valuation, versus Electronic Arts. Take Two Interactive’s revenue growth of 72% over the last three years is roughly 10x that of Electronic Arts’s 7.2%. NBA 2K20 was ranked #2 in top selling games of 2019, only next to Activision Blizzard’s Call of Duty: Modern Warfare. Beyond NBA 2K20, the company’s Borderlands 3 was ranked #4, Grand Theft Auto V at #11 and Red Dead Redemption 2 at #12. As such, Take Two Interactive’s future growth is expected to be strong, with growing user engagement for its franchises.

That said, we still believe Electronic Arts’ business looks quite attractive compared to Take Two Interactive, especially at current valuations. Electronic Arts trades at just 12x 2020 GAAP EPS of $10.30, compared to Take Two Interactive’s stock trading at 40x its 2020 GAAP EPS of $3.54. Electronic Arts’ P/E Multiple has declined roughly 70% from 39.2x in May 2018 to 11.6x currently vs. a 45% decline for Take Two Interactive’s P/E Multiple from 72.8x to 39.7x over the same period. While Electronic Arts’ Net Income Margin of 54% in fiscal 2020 was swelled due to one-time tax gains, even otherwise, at over 20%, the margin was much higher than the 12% figure for Take Two Interactive.

Looking for more gaming stocks insights? See Impact of Lockdown On Gaming Stocks and Why Is There A Mismatch In The Rate At Which Activision Blizzard’s Revenues And Stock Price Have Changed?

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