Stick with Activision Blizzard and Ignore Electronic Arts
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For the first time a video game sound track has been nominated for a Grammy. Little by little video games have come to be a more integrated part of the world's culture. Now consumers are switching to smart phones and tablets; increasing the number of platforms and opportunities for video games. No longer are developers regulated to televisions, desktops, or Game Boys. The development costs for new games on the latest consoles are so expensive that the industry has serious barriers to entry.
Activision Blizzard (NASDAQ: ATVI) is a strong company with no debt and a good mix of hits which will help them to maintain their position in the industry. Massive online multiplayer games like World of War Craft help to create strong and sustainable income which is not dependent upon the one time sales. As distribution platforms move online, Activision Blizzard is in a great position to earning more revenue from add-on content and decrease distribution costs. Their profit margin of 19.9% and EBIT margin of 22.1% are very strong and show that even in the midst of industry wide difficulties ATVI is able to provide profits. At a PE ratio of 14.9 the company is not overly expensive and offers a great way to get into the industry.
Electronic Arts (NASDAQ: EA) is in a tough spot. The Battlefield and FIFA series' digital revenues have greatly increased but will this be enough? The battlefield franchise has grown over the past decade, but EA's overall revenue growth is not as rosy. Their balance sheet is not perfect, but their debt to equity ratio of .25 and quick ratio of 1.00 are respectable. EA's return on equity of .7% and EBIT margin of .9% are nothing to be proud of. The above chart shows how EA is profitable in some quarters, but the yearly cycles in profitability can be volatile and EA has clearly not been able to maintain profitability like ATVI. EA's sports licensing deals helps to give the firm an advantage in the market, but it is unclear if this will be enough to substantially increase profitability. ATVI has strong titles, a history of profitability, strong revenue, and earnings growth which makes it a better investment than EA.
Sony Corp (NYSE: SNE) is a major player in the console market for hardcore gamers with their PlayStation 3 being the only real competitor to Microsoft's Xbox 360. In the midst of relatively high unemployment, selling $60 titles and the monthly costs to play online can be rather challenging. It is not surprising that October has not been a kind month to the industry with hardware showing the greatest decrease in sales. Sony is a very large company and the entire consumer products segment was only 47.2% of revenue in 2011. Over the past 5 years Sony has had nearly flat revenue growth with a rate of -.26%. The next PlayStation is not expected until 2014 and until then Sony will continue to face a constrained consumer who is less willing to shell out hundreds of dollars for expensive gaming hardware.
In November Carl Icahn increased his position in Take-Two Interactive Software (NASDAQ: TTWO) and helped to push it above $11. This smaller publisher is nowhere near the size of EA or ATVI but with titles like Grand Theft Auto 5 set to come out in the spring of 2013, TTWO continues to grow its franchises. Grand Theft Auto is a very popular franchise and has years of goodwill built into it. The firm has a total debt to equity ratio of .67, but its quick ratio is healthy at 1.4. Analysts expect 2013 earnings to be around $1.72 which given the current stock price of $13.04 gives a PE ratio of 7.6. EA is a similar company which lost money in 2009, 2010, and 2011 and they currently trade at a PE of 16.8 based on expected 2013 earnings. A short term play on TTWO has an attractive story and those who get in before Wall Street piles in could make a nice return.
As a dominant and long term player ATVI is an attractive long term investment. They have no debt and use their size to spread out the losses from unsuccessful games while maintaining profitability. The development of new games and successful franchises is expensive and a difficult process. Unlike EA, ATVI has been able to grow a respectable profit margin while in the midst of a challenging industry. For a short term play TTWO trades a very low PE ratio based upon 2013 earnings and the recent purchases of Carl Icahn show that larger investors are starting to pay attention. The video game industry is struggling but the best companies are able to remain profitable and keep a healthy product pipeline.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard and is short Sony (ADR) and has the following options: long JAN 2013 $22.00 calls on Sony (ADR). Motley Fool newsletter services recommend Activision Blizzard and Take-Two Interactive . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!