Activision Blizzard, Inc., (ATVI) in Santa Monica, Calif., is a developer and publisher of interactive entertainment content and services across various gaming platforms, through subscription, full-game, and in-game sales, as well as by licensing software to third-party or related-party companies that distribute Activision and Blizzard products.
Kyoto, Japan-based Nintendo Co., Ltd. (NTDOY) develops, manufactures, and distributes electronic entertainment products internationally. The company offers video game platforms, playing cards, Karuta, and portable and home console hardware systems and related software.
Increasing monthly active users amid pandemic-driven remote lifestyles have boosted the performance of the video game industry over the past year. The successful launch of Microsoft Corporation’s (MSFT) Xbox Series X/S and Sony Corporation’s (SONY) PlayStation 5 last year has increased investor optimism about the industry’s growth prospects. Because a strong vaccination drive is now freeing consumers to again choose among various alternatives for entertainment, new developments made by video game companies with the help of virtual reality and 5G technology should help the industry keep growing. The mobile gaming market is expected to grow at a 12.6% CAGR between 2021 and 2026. So, ATVI and NTDOY should benefit from the industry tailwinds.
Click here to check out our Video Game Industry Report for 2021
While NTDOY lost 8.8% year-to-date, ATVI surged 1.5%. In terms of their past nine month’s performance, ATVI is a clear winner with 20.4% gains versus NTDOY’s 5.8%. But, which of these stocks is a better pick now? Let’s find out.
Latest Movements
ATVI bought 12.68 million shares (11.6% stake) of PLAYSTUDIOS, Inc. (MYPS), a casino game developer for mobile and social platforms, after MYPS went public on June 22, 2021 through a merger with Acies Acquisition Corp (ACACU). MYPS’ 4 million-plus monthly active users and mobile gaming segment’s high contribution to ATVI’s revenue is driving both MYPS and ATVI to capitalize on rising interest and competition in the mobile gaming industry.
In its Corporate Social Responsibility (CSR) report published June 30, 2021, NTDOY declared its energy efficient improvements made for Nintendo Switch and free Nintendo Switch Parental Controls application, that offer extended battery life and monitor children’s gameplay, should enable the company to expand its market reach in the coming months. However, a recent global chip shortage has made NTDOY forecast a 11.5% decline in annual Switch console sales for this year. Consequently, NTDOY, which derives most of its revenues from console sales, is not expected to capitalize on the booming mobile gaming market this year.
Recent Financial Results
ATVI’s net revenues for its fiscal first quarter, ended March 31, 2021, increased 27.2% year-over-year to $2.28 billion. The company’s non-GAAP operating income came in at $981 million, up 38% from the prior-year period. Its non-GAAP net income increased 29.9% year-over-year to $768 million. ATVI’s non-GAAP EPS increased 28.9% year-over-year to $0.98.
For its fiscal fourth quarter ended March 31, 2021, NTDOY’s net sales increased 24% year-over-year to ¥354.45 billion ($3.20 billion). The company’s gross profit came in at ¥201.66 billion ($1.82 billion), up 14.8% from the prior-year period. Its operating profit came in at ¥119.53 billion ($1.08 billion), which represents a 33.6% year-over-year rise. NTDOY’s net profit increased 189.2% year-over-year to ¥103.71 billion ($936.41 million).
Past and Expected Financial Performance
ATVI’s EBIT and net income have grown at CAGRs of 27.9% and 88.1%, respectively, over the past three years. The company’s EPS has increased at an 86.6% CAGR over the past three years.
Analysts expect ATVI’s revenue to increase 2.2% year-over-year in the current quarter (ending September 30, 2021), 3.9% in the current year and 12.7% next year. The stock’s EPS is expected to grow at 16.1% rate per annum over the next five years.
In comparison, NTDOY's EBIT and net income grew at CAGRs of 53.4% and 51%, respectively, over the past three years. The company’s EPS grew at a 51.4% CAGR over the past three years.
Analysts expect NTDOY’s revenue to decrease 9.2% in the current quarter (ending September 30, 2021), and increase 15.9% in the current year, but decline 3.8% next year. Analysts expect the stock’s EPS to decline at a 211.5% rate per annum over the next five years.
Profitability
NTDOY’s trailing-12-month revenue is 1.9 times what ATVI generates. However, ATVI is more profitable with a 72.8% gross profit margin versus NTDOY’s 55.2%.
Also, ATVI’s EBITDA margin and levered free cash flow margin of 37.2% and 33.3%, respectively, compare favorably with NTDOY’s 37% and 33.1%.
Valuation
In terms of non-GAAP forward P/E, ATVI is currently trading at 7.70x, which is 121.3% higher than NTDOY’s 3.48x.
Also, in terms of forward EV/EBITDA, ATVI’s 17.35x is 83% higher than NTDOY’s 9.48x.
POWR Ratings
While NTDOY has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, ATVI has an overall B grade, which equates to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
Both NTDOY and ATVI have a C grade for Value, which reflects their slightly higher valuation compared to peers. NTDOY’s 4.13x trailing-12-month Price/Book is 54% higher than the 2.68x industry average. ATVI’s 4.78x Price/Book value is 78.1% higher than the industry average.
However, in terms of Sentiment, ATVI has been graded a B because analysts expect the company’s revenue to grow 12.7% next year. In comparison, NTDOY’s D grade for Sentiment reflects analysts’ expectation that it’s revenue will decline by 3.8% next year.
Of 23 stocks in the Entertainment - Toys & Video Games industry, NTDOY is ranked #12, while ATVI is ranked #7.
Beyond what we’ve stated above, our POWR Ratings system has also rated both ATVI and NTDOY for Growth, Momentum, Stability, and Quality. Get all NTDOY ratings here. Also, click here to see the additional POWR Ratings for ATVI.
The Winner
Continued in-game purchases and ongoing efforts in launching new games and next-generation consoles should enable both ATVI and NTDOY to grow this year. However, ATVI appears to be a better buy based on favorable analyst sentiment and higher profitability.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Entertainment - Toys & Video Games industry.
Click here to check out our Video Game Industry Report for 2021
ATVI shares were trading at $93.97 per share on Tuesday afternoon, down $0.30 (-0.32%). Year-to-date, ATVI has gained 1.70%, versus a 16.24% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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