Better Buy: Take-Two Interactive vs. Electronic Arts

Limited outdoor entertainment options amid the pandemic helped the video game companies significantly expand their user base and generate solid revenues. Although people’s increased inclination toward outdoor entertainment options has led to a slight decline in sales recently, increasing focus on creating captivating content, free-to-play mobile games with better graphics, quality, and low latency, and advancement of gaming consoles are expected to help the industry thrive.

The global video games market is expected to grow at a 9.3% CAGR to $293.20 billion by 2027. Also, the mobile games segment is projected to grow at an 11.5% CAGR to reach $153.50 billion by 2027. 

Take-Two Interactive Software, Inc. (TTWO) and Electronic Arts Inc. (EA) are two prominent players in the video gaming industry. TTWO develops, publishes, and distributes interactive entertainment software games and consoles worldwide. It provides its products through physical retail, digital download, online platforms, and cloud streaming services. On the other hand, EA develops, publishes, and distributes branded interactive entertainment software across various genres for video game consoles, PCs, handheld game players, and cellular handsets worldwide. It also provides online game-related services.

While TTWO lost 31.3% year-to-date, EA has gained 4.1%. Which of these stocks is a better pick now? Let’s find out.

Latest Developments

TTWO completed its merging with leading video game developer Zynga Inc. on May 23, 2022. Zynga’s next-generation mobile platform, free-to-play expertise, and diverse games offering will exponentially increase its Net Bookings from mobile, the fastest-growing segment in interactive entertainment, while also generating substantial cost synergies and revenue opportunities.

On May 9, 2022, EA partnered with Middle-earth Enterprises, a division of production company The Saul Zaentz Company, to develop a new free-to-play mobile game. Inspired by its popular movie series, The Lord of the Rings: Heroes of Middle-earth, a Collectible Role-Playing Game (RPG), is the newest addition to EA’s expanding mobile portfolio as the company continues delivering exceptional experiences and top live services. The combination of high-fidelity graphics, cinematic animations, and stylized art that immerses players in the fantasy of Middle-earth should see huge demand after its release.

Recent Financial Results

TTWO’s net revenues for its fiscal 2022 fourth quarter ended March 31, 2022, increased 10.8% year-over-year to $930 million. The company’s gross profit came in at $531.38 million, down 5.1% from the prior-year period. Its income from operations came in at $128.86 million, representing a 49.6% rise from the year-ago period. While its net income decreased 49.3% year-over-year to $110.97 million, its EPS fell 0.5% to $0.95. As of March 31, 2022, the company had $1.73 billion in cash and cash equivalents.

For its fiscal 2022 fourth quarter ended March 31, 2022, EA’s net revenue increased 35.6% year-over-year to $1.83 billion. The company’s gross profit came in at $1.41 billion, indicating a 36.9% year-over-year improvement. Its operating income came in at $365 million, representing a 108.6% rise from the prior-year period. EA’s net income came in at $225 million, up 196.1% from the year-ago period. Its EPS came in at $0.80, indicating a 207.7% year-over-year improvement. As of March 31, 2022, the company had $2.73 billion in cash and cash equivalents.

Past and Expected Financial Performance

Over the past three years, TTWO’s revenue and levered free cash flow have increased at CAGRs of 9.5% and 7.1%, respectively.

TTWO’s EPS is expected to decrease 9.1% year-over-year in fiscal 2023, ending March 31, 2023, and increase 71.7% in fiscal 2024. Its revenue is expected to grow 13% in fiscal 2022 and 34.4% in fiscal 2023. Analysts expect the company’s EPS to rise at a 10.6% rate per annum over the next five years.

Over the past three years, EA’s revenue and levered free cash flow have increased at CAGRs of 12.2% and 66.8%, respectively.

Analysts expect EA’s EPS to grow 2.7% year-over-year in fiscal 2023, ending March 31, 2023, and 13.7% in fiscal 2024. Its revenue is expected to grow 6.6% year-over-year in fiscal 2023 and 7.7% in fiscal 2024. Analysts expect the company’s EPS to grow at a 13% rate per annum over the next five years.

Valuation

In terms of non-GAAP forward P/E, TTWO is currently trading at 24.73x, 30% higher than EA’s 19.03x. In terms of non-GAAP forward PEG, EA’s 1.57x compares with TTWO’s 1.67x

Profitability

EA’s trailing-12-month revenue is almost twice as much as TTWO's. EA is also more profitable, with a 25% EBITDA margin versus TTWO’s 20.7%.

Furthermore, EA’s gross profit margin and levered free cash flow margin of 75.3% and 28.2% compare with TTWO’s 58.2% and 18.1%, respectively.

POWR Ratings

While EA has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, TTWO has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both EA and TTWO have been graded a C for Momentum, consistent with their mixed price performance. EA has lost 3.2% over the past nine months, while TTWO fell 24%.

Of the 22 stocks in the C-rated Entertainment - Toys & Video Games industry, EA is ranked #7, while TTWO is ranked #14.

Beyond what we have stated above, our POWR Ratings system has graded EA and TTWO for Sentiment, Quality, Momentum, and Growth. Get all EA ratings here. Also, click here to see the additional POWR Ratings for TTWO.

The Winner

EA and TTWO should benefit from the advancement of their gaming consoles and increased focus on free-to-play mobile games. However, better quarterly financials, relatively lower valuation, and higher profitability make EA a better buy now.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Entertainment - Toys & Video Games industry.

TTWO shares were trading at $122.96 per share on Thursday afternoon, up $0.88 (+0.72%). Year-to-date, TTWO has declined -30.81%, versus a -14.41% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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