Need For Returns: Ditch Electronic Arts Stock For Take-Two Interactive?

Given its better prospects, we believe Take-Two Interactive stock (NASDAQ: TTWO) is a better pick than its peer Electronics Arts stock (NYSE: EA). EA stock trades at a higher valuation multiple of 5.4x revenues, versus 5.1x for TTWO. Electronic Arts’ better profitability and financial position explain this difference to an extent. But there is more to the comparison, and in the sections below we discuss why we think TTWO will outperform EA in the next three years. In this analysis, we compare a slew of factors, such as historical revenue growth, returns, and valuation for Electronic Arts vs. Take-Two Interactive.

1. Both Stocks Have Underperformed In Recent Years

EA stock has seen little change, moving slightly from levels of $145 in early January 2021 to around $147 now, while TTWO stock saw a fall of 25% over the same period. This compares with an increase of about 50% for the S&P 500 over this roughly three-year period.

The performance of EA stock with respect to the index has been lackluster. Returns for the stock were -8% in 2021, -7% in 2022, and 13% in 2023, while returns for TTWO stock were -14%, -41%, and 55% over the same years. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that EA underperformed the S&P in 2021 and 2023 and TTWO underperformed the S&P in 2021. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

2. Take-Two Interactive’s Revenue Growth Is Better 

Take-Two Interactive saw its revenue rise at an average annual rate of 18.9% from $3.4 billion in fiscal 2021 to $5.3 billion in fiscal 2024. On the other hand, Electronic Arts’ sales grew at an average rate of 10.7% from $5.6 billion to $7.6 billion over the same period.

Electronic Arts’ recent revenue growth has been driven by its live services offering, primarily for the FIFA franchise. Furthermore, the company has benefited from acquisitions over the recent years. However, the revenue growth has been tepid lately owing to a broader decline in gaming demand. The average quarterly playtime has seen a significant 26% fall between 2021 and 2023. ^[1] For the previous quarter, Electronic Arts reported a sharp 20% fall in net bookings. This can primarily be attributed to the fact that there was no comparable large-scale release that came close to Star Wars Jedi: Survivor which was released in the prior-year quarter.

Looking at Take-Two Interactive, the strong revenue growth can partly be attributed to its acquisition of Zynga in 2022. Zynga has been seeing a steady rise in revenue, led by its popular mobile gaming franchises, including Toon Blast, Merge Dragons, and Empires & Puzzles. Take-Two Interactive’s own franchises including Grand Theft Auto and NBA2K have also been doing well. The company has fared better lately, with its sales rising 4% in the previous quarter led by higher sales from Match Factory! and Toon Blast games.

Our Electronic Arts Revenue Comparison and Take-Two Interactive Revenue Comparison dashboards provide more insight into the companies’ sales. Looking forward, we expect Take-Two Interactive to witness much faster revenue growth than Electronic Arts, driven by the continued expansion of Zynga’s games and the much-awaited launch of Grand Theft Auto (GTA) 6, likely to be released next year. Its predecessor – GTA 5 – has sold 180 million copies since its release in 2013, garnering close to $8 billion thus far. The new game in the franchise is likely to surpass this figure in fewer years.

3. But Electronic Arts Is More Profitable 

Electronic Arts’ reported operating margin improved to 20.9% in fiscal 2024, compared to 18.6% in 2021, while that for Take-Two Interactive contracted from 18.7% to -21.4% over the same period. However, reported 2024 results for Take-Two Interactive were impacted by a one-time goodwill impairment charge of $2.3 billion and a $0.6 billion charge associated with acquisition-related intangible assets.

4. Electronic Arts Offers Lower Financial Risk

Looking at financial risk, Electronic Arts fares better. Its 5% debt as a percentage of equity is much lower than 15% for Take-Two Interactive. Also, its 22% cash as a percentage of assets is much higher than 8% for the latter, implying that Electronic Arts has a better debt position and more cash cushion.

5. The Net of It All

We see that Take-Two Interactive has seen better revenue growth. However, Electronic Arts is more profitable and has a better financial position. Now, looking at the prospects, we believe TTWO is the better choice of the two, given the expected uptick from GTA 6. Even if we look from a valuation perspective, TTWO fares better. Electronic Arts stock currently trades at 5.4x revenues, higher than the stock’s average P/S ratio of 5.2x seen over the last three years. In contrast, Take-Two Interactive is trading at 5.1x revenues, much lower than its average P/S ratio of 6.6x over the last three years. This implies that TTWO stock has some room to grow, while EA stock looks appropriately priced, in our view.

While TTWO stock may outperform EA in the next three years, it is helpful to see how Electronic Arts’ peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 9/5/2024
[2] Cumulative total returns since the end of 2016

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1. Playtime has decreased since the start of 2021 across the PC and console market, Tom Wijman, Newzoo, April 2, 2024 [↩]