Earnings

A Side-by-side Analysis of Electronic Arts Inc. (EA) and Activision Blizzard, Inc. (ATVI)

Electronic Arts Inc. (NASDAQ:EA) shares are up more than 42.22% this year and recently decreased -0.66% or -$0.74 to settle at $112.01. Activision Blizzard, Inc. (NASDAQ:ATVI), on the other hand, is up 76.18% year to date as of 11/13/2017. It currently trades at $63.62 and has returned 4.52% during the past week.

Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI) are the two most active stocks in the Multimedia & Graphics Software industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect EA to grow earnings at a 14.76% annual rate over the next 5 years. Comparatively, ATVI is expected to grow at a 15.32% annual rate. All else equal, ATVI’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 31.19% for Activision Blizzard, Inc. (ATVI). EA’s ROI is 19.40% while ATVI has a ROI of 8.40%. The interpretation is that EA’s business generates a higher return on investment than ATVI’s.

Cash Flow 




The value of a stock is simply the present value of its future free cash flows. EA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.07. Comparatively, ATVI’s free cash flow per share was +0.45. On a percent-of-sales basis, EA’s free cash flow was 0.45% while ATVI converted 5.15% of its revenues into cash flow. This means that, for a given level of sales, ATVI is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. EA has a current ratio of 2.40 compared to 2.30 for ATVI. This means that EA can more easily cover its most immediate liabilities over the next twelve months. EA’s debt-to-equity ratio is 0.00 versus a D/E of 0.00 for ATVI. EA is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

EA trades at a forward P/E of 22.50, a P/B of 7.89, and a P/S of 6.81, compared to a forward P/E of 24.90, a P/B of 4.82, and a P/S of 6.92 for ATVI. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. EA is currently priced at a -12.52% to its one-year price target of 128.04. Comparatively, ATVI is -10.95% relative to its price target of 71.44. This suggests that EA is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.90 for EA and 1.90 for ATVI, which implies that analysts are equally bullish on their outlook for the two stocks.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. EA has a beta of 0.68 and ATVI’s beta is 1.07. EA’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. EA has a short ratio of 1.99 compared to a short interest of 2.05 for ATVI. This implies that the market is currently less bearish on the outlook for EA.

Summary

Electronic Arts Inc. (NASDAQ:EA) beats Activision Blizzard, Inc. (NASDAQ:ATVI) on a total of 7 of the 14 factors compared between the two stocks. EA generates a higher return on investment and higher liquidity. In terms of valuation, EA is the cheaper of the two stocks on an earnings and sales basis, EA is more undervalued relative to its price target. Finally, EA has better sentiment signals based on short interest.

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