Which Gaming Stock Is A Better Pick – Electronic Arts Or TTWO?

We believe that Take-Two Interactive stock (NASDAQ
NDAQ
: TTWO) is a better pick than its industry peer, Electronic Arts stock (NASDAQ: EA), given its better prospects. EA is trading at a marginally higher valuation multiple of 4.8x trailing revenues compared to 4.4x for TTWO. Investors have assigned a higher multiple to Electronic Arts
EA
stock due to its superior profitability and better financial position, as discussed below.

If we look at stock returns, Take-Two Interactive, with 34% returns this year, has fared much better than Electronic Arts, up 3%, and the broader S&P 500 index, up 14%. There is more to the comparison, and in the sections below, we discuss why we believe TTWO will offer better returns in the next three years than EA. We compare a slew of factors, such as historical revenue growth, returns, and valuation multiples, in an interactive dashboard analysis of Electronic Arts vs. Take-Two Interactive: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Take-Two Interactive’s Revenue Growth Is Better

• Take-Two Interactive’s revenue growth has been better, with a 22% average annual growth rate in the last three years, compared to 11% for Electronic Arts.
• Gaming companies at large benefited from lockdowns during the pandemic, as gamers spent more time on gaming. However, this trend has now cooled off.
• Even if we look at the last twelve month period, TTWO fares better with a solid 53% revenue growth, compared to 6% growth for EA.
• Electronic Arts’ recent revenue growth has been driven by its live services offering, primarily for the FIFA franchise.
• Furthermore, the company has benefited from recent acquisitions, including Playdemic, Codemasters, Metalhead Software, and Glu Mobile
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  .
• Looking forward, the company should benefit from its recent release of Star Wars Jedi: Survivor, along with continued growth in its sports franchises.
• Take-Two Interactive’s significant revenue growth can be attributed to its acquisition of Zynga last year, which has been seeing a steady rise in revenue over the past few years, led by its popular mobile gaming franchises, including Merge Dragons and Empires & Puzzles.
• Take-Two Interactive’s big franchises, including Grand Theft Auto and NBA2K, have also been doing well.
• The company is expected to see a rise in sales driven by the continued expansion of Zynga’s games and the much-awaited launch of Grand Theft Auto 6, likely to be released next year.
• Our Electronic Arts Revenue Comparison and Take-Two Interactive Revenue Comparison dashboards provide more insight into the companies’ sales.
• Looking forward, Take-Two Interactive is expected to see much faster revenue growth in the next three years, driven by the expected launch of GTA 6. Its predecessor – GTA 5 – has sold 180 million copies since its release in 2013, garnering close to $8 billion thus far. The new game in the franchise is likely to surpass this figure in fewer years.
• The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 4.4% for Electronic Arts and 18.9% for Take-Two Interactive, based on Trefis Machine Learning analysis.
• Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

2. Electronic Arts Is More Profitable

• Electronic Arts’ reported operating margin slid from 26.1% in 2019 to 17.9% in fiscal 2023 (fiscal ends in March), while Take-Two Interactive’s operating margin fell from 13.8% to -21.8% over the same period (Take-Two Interactive’s fiscal also ends in March).
• The sharp decline in Take-Two Interactive’s operating margin can be attributed to higher marketing costs and some one-off costs related to the Zynga acquisition.
• Our Electronic Arts Operating Income Comparison and Take-Two Interactive Operating Income Comparison dashboards have more details.
• Electronic Arts’ free cash flow margin of 21% is much better than <1% for Take-Two Interactive.
• Looking at financial risk, Electronic Arts fares better, with its 5% debt as a percentage of equity lower than 13% for Take-Two Interactive, and its 21% cash as a percentage of assets is also higher than 6% for the latter, implying that EA has a better debt position and more cash cushion.

3. The Net of It All

• We see that Electronic Arts is more profitable and has a better financial position. On the other hand, Take-Two Interactive has demonstrated better revenue growth and is available at a comparatively lower valuation multiple.
• Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe TTWO will offer better returns in the next three years than EA
• If we compare the current valuation multiples to the historical averages, Take-Two Interactive fares much better. Electronic Arts stock trades at 4.8x trailing revenues compared to its last five-year average of 5.7x, and Take-Two Interactive’s stock trades at 4.4x trailing revenues vs. the last five-year average of 8.6x.
• Our Electronic Arts Valuation Ratios Comparison and Take-Two Interactive Valuation Ratios Comparison have more details.
• The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 20% for Electronic Arts over this period vs. an 87% expected return for Take-Two Interactive stock, based on Trefis Machine Learning analysis – Electronic Arts vs. Take-Two Interactive – which also provides more details on how we arrive at these numbers.

While TTWO stock looks like it can offer better returns than EA stock, it is helpful to see how Electronic Arts’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Electronic Arts vs. WillScot.

Despite higher inflation and the Fed raising interest rates, EA stock has risen 3% this year. Can it drop from here? See how low Electronic Arts stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

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