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Forget Roku: These 2 Digital Entertainment Stocks Are Better Buys

Motley Fool - Thu Feb 8, 2:31AM CST

Roku(NASDAQ: ROKU) stock has taken investors on a wild ride over the past year, but lately the movement has been all positive. Shares jumped over 60% in the three months that ended in late January, beating a 17% gain in the wider market.

Wall Street is excited by the prospect that Roku will return to profitability in 2024 and that sales growth will keep accelerating thanks to rising advertising demand in the streaming TV space.

Yet you might be right to hesitate on Roku shares following its huge rally in the past year. The good news is there are other attractive options for investors looking at the digital entertainment space. Read on for some good reasons to buy video game developers Take-Two Interactive(NASDAQ: TTWO) and Electronic Arts(NASDAQ: EA) right now.

1. Take-Two Interactive

If you're looking for strong growth potential, then Take-Two Interactive should be near the top of your watch list. That's because the developer will likely boost annual sales by about 40% in the next fiscal year behind a flood of major intellectual property releases. The next installment in the popular Grand Theft Auto franchise is on the way in fiscal 2025, for example, along with several yet-to-be-announced titles.

Take-Two is targeting about $8 billion of annual sales once these launches fill out the portfolio over the next 18 months. Management has said that this boost will result in impressive cash flow and earnings, and that steady gains in these metrics will continue in future fiscal years. In other words, shareholders aren't likely to be disappointed by highly volatile sales and earnings results from this video game developer now that it has a wider content portfolio.

Investors will get more details on these ambitious plans when the company announces its fiscal Q3 results in mid-February. There's always the possibility that Take-Two will delay a major title or lower its short-term targets, which would disappoint Wall Street. But investors can feel optimistic about its expected 40% sales spike ahead, especially compared to the 10% annual increase likely on the way in Roku's top-line business in 2024.

2. Electronic Arts

Electronic Arts will appeal more to investors seeking an established video game giant to fill out their growth portfolio. The company is already booking nearly $8 billion of revenue and has huge footholds in niches like sports, casual gaming, and premium game content. "Our incredible teams delivered a strong Q3," executives said in late January after reporting 8% higher sales over the previous 12 months.

EA isn't growing as quickly as Roku or Take-Two right now. Sales are rising at a low single-digit rate into early 2024, in fact. Yet investors get some attractive financial assets in exchange for that slower expansion profile.

Free cash flow was a robust $2.2 billion in the past year, which shows off the power of its gaming-as-a-service sales approach. Services revenue, which are highly profitable and tend to recur each year, accounted for $5.6 billion -- or 72% -- of revenue in the past year.

Roku, by contrast, relies on advertising sales to power most of its growth. Investors saw in early 2023 how that approach can expose the company to weaker sales even as its TV audience size increases.

EA's recurring revenue business is more robust and more profitable, and it delivers ample cash flow that the developer can direct back toward growth initiatives like constant content innovation. That's a powerful combination for any digital entertainment specialist, and it is likely to result in great returns for patient shareholders in 2024 and beyond.

Should you invest $1,000 in Electronic Arts right now?

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

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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