What’s more, ATVI expects its sales for the year to be higher than previously expected due to stronger demand for the new children’s game Skylanders that it started selling in October and larger-than-anticipated sales for Call of Duty: Modern Warfare 3. ATVI was up 2% in early after-hours trading.
Attention now will shift to a battle for shooter market share between Activision’s Modern Warfare 3 and EA’s just-released Battlefield 3. Both companies hope these games will reverse a negative trend.
Meanwhile, EA’s latest results for its second quarter were better than expected. Its adjusted profit of $17 million was five cents per share — better than the five-cent loss analysts had projected. And EA’s sales rose 17% to $1.03 billion — exceeding expectations by more than 9%. However, without the adjustments, EA reported a loss of $340 million — $139 million worse than its 2010 second-quarter loss.
So here’s what the investment choice between ATVI and ERTS boils down to:
- Activision: Strong growth, decent margins; slightly expensive stock. ATVI’s sales have increased a small 3.9% in the past 12 months to $4.77 billion, but net income has soared, up 270% to $645 million — yielding a 13.8% net profit margin. Its price/earnings-to-growth ratio of 1.17 (where a PEG of 1.0 is considered fairly priced) is a bit expensive on a P/E of 24.1 and expected earnings growth of 20.63% to 89 cents in 2012.
- Electronic Arts: Slow growth, losing money; cheap stock. EA’s sales have dropped 1.8% in the past 12 months to $3.86 billion, while its net declined 59.2% to a loss of $290 million. Its PEG of 0.54 is cheap on a forward P/E of 27.8 and expected earnings growth of 51.47% to 88 cents in fiscal year 2013.
I would rather take a chance on Activision than EA. Both are facing a considerable threat from social gaming; both are having trouble adapting, though EA admittedly is doing better than ATVI. But Activision’s financial house is in much better order. Nevertheless, if EA achieves its fiscal 2013 earnings goal, its stock is screamingly cheap. But I think that target could be hard to hit.
In this shooting war, I’d give the edge to Activision.
As of this writing, Peter Cohan did not hold a position in any of the aforementioned stocks.