Zacks
0
All posts from Zacks
Zacks in Our Research. Your Success.,

ATVI vs. EA: Which Stock Looks Better Ahead of Q3 Earnings?

There are several factors that are expected to bolster third-quarter earnings growth for the online gaming companies. First, online gaming platforms managed to maintain a strong customer base with mobile and gaming picking pace with no indication of ceasing. Also, both augmented reality (“AR”) and virtual reality (“VR”) games are gaining foothold and presumed to be the key factors for growth.

The success of the sector is evident from its strong year-to-date performance. The ETFMG Video Game Tech ETF (GAMR) has gained 50.7% so far this year and 7.1% in the last three months.

Both online gamers Activision Blizzard, Inc. ATVI and Electronic Arts Inc. EA are scheduled to report third-quarter earnings results on Oct 31 and Nov 2, respectively. It will be prudent to consider which of this is a better stock, ahead of their numbers. While, Activision sports a Zacks Rank #1 (Strong Buy), Electronic Arts holds a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other major earnings scheduled this week include Facebook, Inc. FB and Apple Inc. AAPL

Price Performance

The online gaming sector has managed to maintain their steady price performance, which is apparent from thebroader industry’s gain of 35.7% in a year. Both Activision and Electronic Arts beat the industry’s performance. Electronic Arts has increased 48.9%, while Activision has advanced 48.6%.

Valuation

There are a variety of valuation ratios, of which we have used EV/EBITDA for the online gaming industry. This metric is considered the most-popular valuation tool as it helps investors find out online gaming companies with a healthy EV/EBITDA within a particular sector. This metric is better than the most common valuation ratio, P/E, mainly because it is not affected by different capital structures of two gaming companies.

As the online gaming industry is not capital intensive, we have not taken a ratio like P/B. Instead we have used EV/EBITDA, which shows whether the profit produced by all the games released by the company during a particular period is enough to justify its enterprise value.

On the valuation front, both Activision and rival Electronic Arts are overvalued than the broader industry. The EV/EBITDA values for Activision and Electronic Arts are 15.22 and 20.25, respectively, while that for industry is 15.14. However, Activision is undervalued than Electronic Arts.

Net Margin

The online gaming industry generally possesses high profit margins, mainly because of its ability to penetrate the market more easily than several other industries. Also, strong demand for online games this holiday season is expected to boost the profitability of the sector.

With a net profit margin TTM (BNRI) value of 23.27%, Electronic Arts clearly outperforms Activision, which came up with a reading of 23.11%. The net margin of both companies was higher than that of industry’s net margin TTM value of 18.83%, which in turn was higher than that of the S&P 500’s reading of 13.37%.

Dividend Yield

The dividend yield offered by both Activision and Electronic Arts was lower than the broader industry, in a year’s time. The industry has returned 0.63% over the period. Electronic Arts’ dividend yield during the aforementioned period is 0%, while that of Activision is 0.47%. Activision has a better dividend yield than Electronic Arts.

Earnings History, ESP and Estimate Revisions

Considering a more comprehensive earnings history, Activision delivered positive surprises in each of the prior four quarters with an average earnings surprise of 39.81%. In comparison, Electronic Arts delivered an earnings beat in three of the trailing four quarters, with an average positive earnings surprise of 27.34%.

When considering Earnings ESP, Activision turns out to be a clear winner. With an ESP of +3.83%, Electronic Arts is at a disadvantage against Activision, which holds a value of +5.80%. Meanwhile, Electronic Arts’ Zacks Consensus Estimate for the current year has increased by 0.2% over the last 60 days, while Activision’s has advanced 2.5% during the same period.

Outlook

The online gaming industry is gaining traction ahead of the holiday season. Major online game publishers are gearing up for their new releases. Two key players, Activision Blizzard and Electronic Arts, are set to launch Call of Duty: World War II and Star Wars Battlefront, respectively, early next month. New game launches and seasonal demand during the holiday period are expected to facilitate growth for online game stocks. Additionally, online gaming companies are now adopting new pricing models, where a gamer can opt to subscribe to a game instead of purchasing it.

Conclusion

In our analysis, when we compared the price performance of both the companies, Electronic Arts holds an edge over Activision by only 0.3%. Moreover, considering net margin, Electronic Arts is better than Activision. However, when considering EV/EBITDA and dividend yield, Activision is better placed than Electronic Arts.

Additionally, when we take a more comprehensive look at the companies’ previous earnings performance and estimate revisions, Activision is clearly the better stock. What seals the deal for Activision is its strong EPS over Electronic Arts and a better Zacks Rank. In this respect, it is evident that Activision holds a stronghold over Electronic Arts ahead of their Q3 earnings release this week.

Zacks’ Best Private Investment Ideas

While we are happy to share many articles like this on the website, our best recommendations and most in-depth research are not available to the public.

Starting today, for the next month, you can follow all Zacks' private buys and sells in real time. Our experts cover all kinds of trades… from value to momentum . . . from stocks under $10 to ETF and option moves . . . from stocks that corporate insiders are buying up to companies that are about to report positive earnings surprises. You can even look inside exclusive portfolios that are normally closed to new investors. Click here for Zacks' private trades >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Facebook, Inc. (FB): Free Stock Analysis Report
 
Apple Inc. (AAPL): Free Stock Analysis Report
 
Activision Blizzard, Inc (ATVI): Free Stock Analysis Report
 
Electronic Arts Inc. (EA): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research