For growth-oriented investors, the video game sector presents a compelling landscape. Audience bases are expanding, even for established developers, and monetization strategies are evolving positively post-pandemic.
As games transition to a software-as-a-service (SaaS) model, their value increases substantially. Rather than a one-time $60 revenue bump for a title, companies now enjoy continuous income streams for extended periods through microtransactions and ongoing content updates.
Take-Two Interactive Software (NASDAQ: TTWO) stands out as a top contender in the industry, primed for significant revenue growth with the impending release of several major titles, potentially reaching an annual revenue of $8 billion. This figure rivals the yearly sales of industry giant Electronic Arts (NASDAQ: EA). However, despite Take-Two’s appeal, EA might offer more promising investment prospects. Here’s why.
A bird in the hand
While Take-Two’s upcoming release lineup generates significant investor enthusiasm compared to EA’s, it’s essential to approach sales forecasts with caution. EA, known for franchises like EA Sports and Apex Legends, anticipates a modest 3% sales growth to approximately $7.8 billion in fiscal 2025. Conversely, Take-Two projects a substantial 40% sales growth by 2025, fueled by the launch of several highly anticipated titles, including a major update to the Grand Theft Auto series.
However, investors should temper their expectations regarding these forecasts. Delays in big video game releases are common, and the reception from gamers for launches scheduled months ahead is unpredictable. EA relies on a proven portfolio of established intellectual property, contrasting with Take-Two’s more ambitious pipeline. Consequently, Take-Two carries higher risk due to its extensive slate of title launches planned over the next 18 months.
Follow the cash
Likewise, although Take-Two anticipates robust cash flow generation in the near future from its upcoming releases, I favor owning a company already demonstrating substantial cash generation. EA is poised to generate $2 billion in operating cash flow this year, equivalent to nearly 30% of its sales. In contrast, Take-Two’s comparable metric remains in negative territory, a trend persisting for approximately a year.
The contrast becomes even more evident when considering earnings. EA consistently generated over $1 billion in profit in each of the last two fiscal years, whereas Take-Two’s losses have widened during the same period.
The next EA
Wall Street is buzzing with anticipation for Take-Two’s potential to approach $8 billion in annual bookings by next year. The recent acquisition of Zynga significantly bolsters its presence in the casual gaming market, and by 2025, its diversified portfolio may mitigate the risk associated with individual game releases that could negatively impact wider results.
However, EA already boasts all these competitive advantages and is currently valued at approximately the same multiple of annual sales as Take-Two. For investors, opting for the established, more profitable, and more stable company at this price seems like a prudent choice.
While investing in Take-Two might yield impressive short-term returns if its upcoming major releases perform well, investors may find it worthwhile to pass on this company in favor of its video game stock rival.
