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Better Buy: Take-Two Interactive vs. Electronic Arts

Motley Fool - Sun Jul 30, 2023

Investors have very different opinions on Take-Two Interactive(NASDAQ: TTWO) and Electronic Arts(NASDAQ: EA) stocks. The video game giants are both experiencing a growth slowdown compared to their pandemic demand spikes, yet Take-Two is beating the market by a wide margin in 2023 while EA is trailing the S&P 500 so far this year.

Wall Street is more excited about Take-Two's potential, even though EA offers more concrete advantages around earnings stability. Against that broad backdrop, let's stack the two companies against each other to see which would make the better fit for your portfolio.

Take-Two is growing

This past full fiscal year was a good one for both businesses, but Take-Two wins the growth matchup. Sales jumped 53% to $5.4 billion, with a big assist coming from its recent acquisition of Zynga. Some of the company's biggest internal franchises helped as well, including NBA 2K23 and Grand Theft Auto V.

Electronic Arts set new sales records this past year, too, and extended its leadership position in the industry. Sales improved to $7.4 billion from $7 billion in fiscal 2022 on the strength from its wide and stable content portfolio that's packed with hit franchises , including EA Sports FIFA, Apex Legends, and The Sims.

EA is cash rich

EA comes out well ahead in terms of its finances. The company is generating steady profits today, with net income landing at about $800 million in each of the last two years. Take-Two reported a $1.1 billion loss this past year, in contrast. Sure, that loss was partly due to one-time charges around its Zynga acquisition. But investors don't yet have a good idea of where Take-Two's profits will land once the businesses are fully integrated.

TTWO Cash from Operations (TTM) Chart

TTWO Cash from Operations (TTM) data by YCharts

Cash flow tells a similar story. EA generated more than $1.5 billion of operating cash flow in each of the past two years, illustrating the financial power of its software-as-a-service sales model. Take-Two barely broke even on this score in fiscal 2023 and generated only $258 million of operating cash flow in the prior year.

The growth outlook

There's not much daylight between the two stocks when it comes to their sales outlooks. Both businesses are predicting a flat year ahead as gamers continue to cut back on discretionary purchases. Yet stable results favor EA, which has a bigger sales base and generates ample cash flow right now.

The main draw for Take-Two stock is that the business is prepping for a much bigger fiscal 2025. A flood of new content releases should launch the business up above $8 billion of annual sales, management estimates, putting it in the same league as EA. Take-Two is suggesting that annual cash flow will cross the $1 billion mark that that time, too, with further gains ahead. "We expect to sustain this momentum with additional growth ... in fiscal 2026," executives told investors in mid-May.

Price and value

If you're not risk-averse, then Take-Two could be the better option to hold now as you wait for fiscal 2025 to arrive. The stock is valued at a discount compared to EA, with the price-to-sales ratio landing at 4.5, against EA's 5.1. That valuation gap reflects Take-Two's weaker profits, balanced against its potential for faster growth starting next year.

Most investors will prefer EA right now, though. It already maintains the type of balanced portfolio of video game content that Take-Two is aiming to build by 2025. And it already generates ample cash flow and profitability. Rather than hoping for a string of game-changing releases out of Take-Two, then, consider simply owning EA as a less risky option.

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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Take-Two Interactive Software. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.

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