The demand for gaming was accelerated by COVID-19 pandemic-led remote lifestyles last year. And while the economy’s reopening this year has been shifting people’s recreational focus to outdoor activities, the increasing availability of cloud gaming should continue driving the industry’s growth. So, Gaming giants Electronic Arts (EA) and Zynga (ZNGA) should benefit. But which of these stocks is a better buy now? Read more to find out.
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Electronic Arts Inc. (EA) in Redwood City, Calif., develops, markets, publishes and distributes games, content, and services for game consoles, PCs, mobile phones, and tablets worldwide. It develops and publishes games and services across various genres. In comparison, Zynga Inc. (ZNGA), in San Francisco, provides social game services internationally. The company develops, markets, and operates social games as live services on mobile platforms, social networking platforms, and personal computer consoles.
The COVID-19 pandemic has proved to be a blessing in disguise for the gaming industry, which saw a major surge in its consumer base because people spent most of their time at home during the worst of the public health crisis. Even though a semiconductor shortage and shift in consumer focus now toward outdoor activities could hurt the gaming industry in the near term, the increasing availability of online, mobile, and cloud gaming should deliver decent growth. Indeed, according to a Fortune Business Insights report, the global gaming market is expected to grow at a 13.2% CAGR between 2021 – 2028. Consequently, both EA and ZNGA should benefit.
EA has gained 4.7% in price over the past six months, while ZNGA generated negative returns. Also, EA’s 6.8% gains over the past year are higher than ZNGA’s negative returns.
But which of these two stocks is a better buy now? Let’s find out.
In July, EA reached an agreement with Low Tide Properties and PCI Developments to occupy 1077 Great Northern Way in the new False Creek Flats area. Jon Lutz, Vice President of Strategy, Operations, and Finance, said, “We’re excited to have this great new footprint, with amazing amenities for our team, to add to our flagship Burnaby studio as we continue to invest in our teams and leadership in the market.”
On August 05, ZNGA announced it had entered into a definitive agreement to acquire StarLark. The acquisition brings a talented development team with the proven ability to create a global hit and has additional projects in early development. It also expands Zynga’s international presence by establishing a China-based studio with access to the region’s creative talent base.
Recent Financial Results
EA’s net revenue surged 15.2% sequentially to $1.55 billion for the first quarter, ended June 30, 2021. The company’s operating income grew 84% sequentially to $322 million, while its net income came in at $204 million, representing a 168.4% sequential increase. Also, its EPS was $0.71, up 173.1% sequentially.
ZNGA’s revenue surged 59% year-over-year to $720 million for the second quarter ended June 30, 2021. The company’s adjusted EBITDA grew 148% year-over-year to $174 million. Also, its net income came in at $27.80 million, compared to a $150.30 million net loss in the prior-year quarter, while its EPS was $0.02, versus a $0.16 loss per share in the year-ago period.
Past and Expected Financial Performance
EA’s revenue and total assets have grown at CAGRs of 5.7% and 15.6%, respectively, over the past three years. Analysts expect EA’s revenue to increase 22.3% in fiscal 2021 and 6.4% in fiscal 2022. The company’s EPS is expected to grow 2,200% for the quarter ending September 30, 2021, and 11.9% in fiscal 2022. Moreover, its EPS is expected to grow at a 26.2% rate per annum over the next five years.
In comparison, ZNGA’s revenue and total assets have grown at CAGRs of 41.8% and 45.6%, respectively, over the past three years. The company’s revenue is expected to increase 23.9% in its fiscal year 2021 and 10.8% in fiscal 2022. Its EPS is expected to decline 30% for the quarter ending September 30, 2021, but grow 28.6% in fiscal 2022. ZNGA’s EPS is expected to grow at a 9.2% rate per annum over the next five years.
EA’s trailing-12-month revenue is 2.27 times ZNGA’s. EA is also more profitable, with 73.41% and 16.24% respective gross profit and EBIT margins, versus ZNGA’s 60.30% and 12.54%.
Furthermore, EA’s 4.83% and 6.13% respective ROA and ROTC compare with ZNGA’s 4.02% and 5.68%.
In terms of forward non-GAAP PEG, ZNGA is currently trading at 2.45x, which is 87% higher than EA’s 1.31x. And ZNGA’s 22.62x forward non-GAAP P/E ratio is higher than EA’s 20.74x.
So, EA is the more affordable stock.
EA has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. In contrast, ZNGA has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
EA has a B grade for Quality. This is justified given EA’s 16.24% trailing-12-month EBIT margin, which is 48.4% higher than the 10.95% industry average. On the other hand, ZNGA has a Quality grade of C.
EA has a B grade for Sentiment, which is in sync with favorable analyst sentiment. ZNGA has a grade of D for Sentiment.
Of the 23 stocks in the Entertainment – Toys & Video Games industry, EA is ranked #4, while ZNGA is ranked #15.
With increasing entertainment needs, the gaming sector is expected to grow in the near term. While both EA and ZNGA are expected to gain in the long run, we think it is better to bet on EA now because of its lower valuation, higher growth estimates, and superior profitability.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Entertainment – Toys & Video Games industry here.
EA shares were trading at $136.93 per share on Thursday morning, down $0.11 (-0.08%). Year-to-date, EA has declined -4.30%, versus a 19.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal’s fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.