Activision vs EA – Video Game Battle

By Chad Henage - February 2, 2012 | Tickers: ATVI, EA | 0 Comments

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When most people think of video games, they think of titles produced by one of two companies Activision Blizzard (NASDAQ: ATVI) and Electronic Arts (Nasdaq: EA). These two companies produce some of the most recognizable titles in the industry with Call of Duty, World of Warcraft, Battlefield, Madden, and the like. If you are a gamer and investor you might wonder which company is the better buy? That's what we are here to find out. We'll keep score and see who wins this video game battle.

First, let's compare the two companies on current earnings and expected growth.

Activision sells for the cheaper price with lower expected growth. EA has the higher price with higher expected growth. Activision pays a dividend and EA does not. I don't know that the future growth rate is believable for EA so I'm giving this section to Activision. I'll explain next why I don't see EA's future growth rate as realistic. (Activision – 2, EA – 1)

When it comes to future growth, looking at past growth rates can be a good guide. If you compare the past earnings growth rates of the two companies you'll see a very big difference. Activision has been growing earnings at 8.45% in the last several years. By comparison EA has seen earnings decline by over 13%. This explains why I don't know if it's realistic to expect EA to go from negative 13% to positive 17% growth. (Activision – 2, EA – 1)

Performance versus analysts estimates can also give us a guide to which company will do better than expectations. In this case Activision and EA have both done very well. Activision has beaten estimates by an average of 103% in the last 4 quarters. EA has beaten estimates by an average of 62.5%. While both numbers are impressive, Activision has been more consistent so this category goes to ATVI. (Activision – 2, EA - 1)

Cash flow is also an important metric to determine which company is more deserving of your investment dollars. Activision in the last 4 quarters has averaged positive free cash flow of over $255 million a quarter. This is a huge difference between the two companies as EA is showing negative free cash flow on average of about $750,000 in the last 4 quarters. (Activision – 2, EA – 1)

One of the most important things to look at when comparing companies is their respective balance sheets. The health of a corporation's balance sheet can tell you if the company has the wherewithal to make it through tough times. Activision has over $2.8 billion between cash and short term investments with no long term debt. EA on the other hand shows about $1.5 billion between cash and short term investments with over $500 million in long term debt. (Activision – 2, EA – 1)

The toughest part of figuring out which company to buy is gauging what their future holds. Analysts expect higher growth from EA than from Activision. EA appears to have the beginnings of an online hit on its hands with the new “Star Wars: The Old Republic”. If this game does well it will help EA narrow the gap with Blizzard's “World of Warcraft” game. It seems that the most recent version of Modern Warfare is doing better than Battlefield 3. EA has the enviable position of having the NCAA and Madden franchises locked up which gives them some nice consistent cash flow. In the end it's probably about even, with Activision having a slight edge in better sales of its most popular game and a more established online multiplayer history. We'll call this category a tie just for arguments sake. (Even – 1 each)

Adding up the results we get Activision with 11 points against EA with 6 points. Activision has the bigger series in Call of Duty, the larger online multiplayer audience, and better cash flow. Given how consistently Activision has beaten analysts estimates its easy to see how they might grow faster than the 12.17% being projected. Check out the numbers for yourself and decide if you want to take to the battlefield with EA, or hear the call of duty from Activision.

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