- Activision's purchase of King Digital Entertainment sets them up well for the future.
- EA enjoys strong revenue growth year-on-year.
- EA's successful dominance of console and mobile-based gaming gives them a significant edge.
For instance, Activision Blizzard produces wildly successful titles such as Call of Duty and subscription-based World of Warcraft.On the other hand, EA produces titles such as Fifa and the Madden series. I will be delving into why both stocks are a good addition to your portfolio and which one is the better buy.
During the transition from console based gaming to more mobile focussed gaming, many gaming companies were wiped out due to their inability to adapt. However, Activision Blizzard had a smooth transition, and can now attribute 37% of its top line to digital sales. Despite this, they have had the foresight to see where the industry is headed and have made a multi-billion dollar investment by acquiring King Digital Entertainment.
The ROI for selling games digitally is huge. They don’t have to worry about distributing discs. Moreover, the rapidly expanding ‘freemium’model of making games available for free and then making money from in-app purchases, provides a huge opportunity. Interestingly, in-app currencies or “boosts” basically offer nothing for something. As a result, anything made on the transaction is profit.
Activision Blizzard’s purchase of King Digital Entertainment helps to cement their place as one of the largest and most innovative gaming companies of the past decade.
Notably, the gaming industry can be wildly unpredictable. The gaming industry is becoming more open; therefore, an unknown developer can have their game go global. A perfect example of this is the wild success of “Flappy bird” which was built by an independent game developer. At this moment in time, the main advantage big game developing companies like Activision Blizzard have is that they have big marketing budgets.
Consequently, the growth of Activision Blizzard lies in their ability to keep creating blockbuster games.
Activision Blizzard stock
Activision Blizzard posted their latest earnings update on February 11th and missed analysts’ estimates with regards to earnings per share ($0.83 vs $0.86) and revenue ($2.12 billion vs $2.20 billion). However, Activision Blizzard increased their quarterly dividend from $0.23 per share to $0.26.
It is worth noting that Activision Blizzard's earnings miss was down to high expectations more than anything else. We can expect to see a significant increase in revenue during the next quarterly result and this is due to their purchase of King Entertainment. You can expect profit to be down for the year, and this will be due to costs associated with the purchase of King Entertainment.
EA have continued to go from strength-to-strength and have a solid management team able to adapt quickly to market forces. For instance, they managed to thrive when consoles were the main way people consumed gaming content, and were able to make a smooth transition to mobile based gaming. The same can’t be said for former gaming powerhouses.
For instance, no other gaming company does the freemium model better than EA. For instance, in their FIFA franchise, they have been able to sell the popular game while bundling it with an “Ultimate team” feature. This allows gamers to purchase in-game currency in order to increase their rate of progress and enjoyment. Ultimate team has proven so popular that there is a thriving online industry based on it, with entrepreneurs trading ultimate team coins online. Interestingly, they have been able to roll this out on mobile too.
Consequently, EA is able to sell a mobile game for $0.99 but make many times that from certain customers. Moreover consumers are heavily encouraged to buy, and due to the fact that purchases are low in price, they don’t realize how much they are spending over time. It is a good case of psychology and business coming together as one.
Notably, EA continues to beat analysts’ estimates. For instance, in their latest earnings report on January 28th, EA posted $1.83 earnings per share, which was significantly higher than analysts’ estimates. Zacks analyst consensus anticipated an EPS of $1.81. At the moment, EA is growing earnings at a rate of 10% per year. This is fueled by their 300 million global users, and their ability to keep making blockbuster games. Fortunately, digital delivery is on the rise. This has much higher margins which EA and its investors can capitalize on over the coming years.
In comparison to Activision Blizzard, EA stock is a lot less volatile.Fortunately, the market is yet to catch up to EA’s strong revenue growth and potential. Therefore, this leads me to believe that EA stock is currently undervalued. With virtual reality gaming around the corner, EA will be able to provide more captivating gaming experiences. Historically, EA has been willing to innovate in order to stay ahead of competitors. Arguably, they were the first big gaming company to capitalize on in-game purchases… and do it best.
In conclusion, Activision Blizzard is a strong gaming company, but EA is the company you want to put your money on. In an era of so much choice with regard to gaming, they continue to set the revenue model for the entire industry to follow. Plus, they are always willing to experiment and adapt. This is key in such a competitive -and at times- volatile industry.