Activision Vs Zynga Stock: Which Is Best?

Activision Vs Zynga Stock: Computer game companies have been the focus of renewed interest lately due to the recent publicity surrounding Reddit’s WallStreetBets and the subsequent short squeeze on GameStop stock.

But for investors, it’s difficult to know which companies offer the best value. Below, we’ll look at two different computer game developers, and assess why, and why not, they might make for an excellent investment.

The Bull Case For Activision Blizzard 

Activision Blizzard (ATVI) is one of the biggest computer game companies in the world. It boasts a roster of 400 million users and produces such well-established game brands as the World of Warcraft franchise and Call of Duty. 

As with many interactive entertainment companies during the coronavirus pandemic, Activision Blizzard saw its revenues surge as more and more people stayed home and turned to computer games as a means of passing their time.

Indeed, the tailwinds from the crisis saw a record year in 2020, with more than 100 million monthly active players for its Call of Duty franchise alone.

Not surprisingly, fourth quarter financial results for Activision Blizzard were better than expected.

The company increased net bookings from $2.73 billion to $3.05 billion and grew free cash flow by 27% to $1.12 billion.

Revenue increase also converted well into profitability, as earnings per share for the fiscal year jumped 45%.

The Bear Case For Activision Blizzard 

Although the company’s net bookings increased to a total of $8.4 billion in 2020, Activision is still reliant on just three of its franchises to generate $1 billion of that money.

Continued monetization and growth engagement for these titles will be needed to sustain these sales figures into the future, while management has suggested that another two franchises could account for similar numbers going forward.

The problem with this optimistic growth outlook is that the games’ industry has an ever-shrinking moat for newcomers to the business.

There’s no longer any need for complex and costly distribution networks as most games are now sold electronically, and game design has been democratized with easy and cheap access to powerful game creation engines.

With the barriers to entry so low, big game developers like Activision Blizzard will face more and more competition from sophisticated rivals, making continued growth that much harder.

Why Buy Zynga Stock? 

Zynga (ZNGA) is the social games developer behind the immensely popular FarmVille title. Over the years the firm has created a whole host of proven brands, including Empires & Puzzles, Zynga Poker and CSR Racing 2.

Fourth quarter results for Zynga broke multiple company records, including an all-time high revenue of $616 million, a 119% year-on-year increase in operating cash flow, and a 77% increase in average mobile daily users of 36 million.

The firm has been in the process of transitioning its products from mainly social network-based platforms like Facebook (FB), to cross-platform venues such as mobile applications, PCs and consoles. This is a growth driver for Zynga as the cross-platform has been a hitherto untapped market for the company.

Furthermore, Zynga has branched out into the hyper-casual game market with its acquisition of Istanbul-based mobile game developer Rollic, and the company predicts that the main segment of its advertising revenue in fiscal 2021 will come from the free-to-play titles it gained due to the merger.

Rollic’s games are extremely popular; many of its titles have reached the #1 and #2 spots in the US App Store, and have seen 365 million total downloads so far.

Zynga believes that the deal will provide cross-selling opportunities as a funnel from one publisher to the other. 

Risks Of Investing In Zynga 

Looking at Zynga’s current financials might indicate that the company is somewhat overbought, and compared to its peers the firm is trading at a premium.

For instance, Zynga’s 12-month Forward P/E ratio is almost 26, whereas SciPlay Corporation, a key competitor in the industry, is much lower at just 16. The outlook is similar when you consider Forward Price-to-Sales, with Zynga at 4.24 and SciPlay at 0.63.

Zynga’s revenue is estimated to grow at 20% year-on-year to $2.7 billion, but any potential upside for the investor appears to have already been priced in.

Another looming downside catalyst for Zynga is the upcoming change to Apple’s Identifier for Advertisers terms. Privacy concerns have prompted the iPhone manufacturer to make it that users will have to opt-in to allow advertisers to track their activity, which will almost certainly have a negative impact on companies like Zynga which rely on targeted ads to drive revenue.

Zynga has acknowledged that this change will create “modest pressure” for its business model, but it is optimistic that it can weather the storm. However, it remains to be seen how this will play out in reality, and only time will tell. 

Activision Vs Zynga Stock: Which Is Better?

Activision’s growth in user base and bookings revenue is certainly attractive, but the company is overly reliant on just a few of its titles to generate a sizeable portion of its sales. The increasingly competitive nature of the industry is also poised to put pressure of its growth aspirations too.

Zynga, on the other hand, is expanding aggressively with its recent purchase of Rollic, and is breaking records when it comes to cash flow and daily users. But developments on the mobile platforms it runs its advertisements on, and which it generates much of it revenue, have caused a fair amount of uncertainty for the company going forward. 

Either way, both Activision Blizzard and Zynga offer excellent opportunities for investors wanting to profit off of the recent boom in game developer stock.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.