Why I'm Not Buying Take-Two Interactive Stock Right Now, and Considering This Stock Instead

There’s more than just one way to get exposure to the growing video game industry.

For growth investors, the video game industry is one that’s worth watching. Audience sizes are expanding even among the most established developers, and monetization trends keep improving following the post-pandemic lull.

Meanwhile, video games are becoming far more valuable products now that they’re sold through a software-as-a-service (SaaS) model. Rather than seeing a single $60 revenue spike for a title, companies often book a full year (or more) of regular income from a release in addition to that initial cash outlay — once you factor in many rounds of micro transactions and content updates.

Take-Two Interactive Software (TTWO 0.97%) is among the most popular stocks in the industry today, mainly because the company is about to release several large games that should propel it toward $8 billion of annual revenue. That’s about where the industry giant Electronic Arts (EA 0.56%) sits in its yearly sales haul. But EA might still be a better buy than its smaller peer. Here’s why.

A bird in the hand

It’s true that investors aren’t nearly as excited about EA’s upcoming release pipeline as they are for Take-Two’s calendar. The owner of the EA Sports and Apex Legends franchises is expected to boost sales by just 3% in fiscal 2025 to roughly $7.8 billion. Take-Two, on the other hand, has forecast sales growth of near 40% by 2025 as it launches several huge new titles, including the first major update to the Grand Theft Auto franchise in years.

Investors shouldn’t put too much faith in those forecasts, though. Delays are common among big video game releases, for one, and there’s no telling how receptive gamers will be to launches that occur many months from now. EA is leaning on a proven line of established intellectual property, compared to Take-Two’s more ambitious pipeline. In other words, there’s higher risk involved with Take-Two ahead of its dozens of title launches slated for the next 18 months.

Follow the cash

Similarly, while Take-Two believes the next year or so of releases will propel it into strong cash flow generation, I’d prefer to own the company that’s already producing ample cash. EA is on track to generate $2 billion of operating cash flow this year, translating into almost 30% of sales. Take-Two’s comparable metric is in negative territory, just as it has been for about a year.

EA Cash from Operations (TTM) data by YCharts

The gap is even more stark with respect to earnings. EA generated over $1 billion of profit in each of the last two fiscal years, while Take-Two’s losses have expanded over that time.

The next EA

Wall Street is excited about Take-Two’s potential to approach $8 billion of annual bookings by next year. Its recent Zynga acquisition gives it a huge presence in casual gaming, and by 2025 it might finally have a large enough portfolio that a single bad game release won’t threaten to torpedo its wider results.

EA already enjoys all of these competitive assets, though, and it is valued at about the same 5 times annual sales that investors are paying for Take-Two right now. For my money, it makes sense to own the established, more profitable, and more stable company at that price.

Yes, you have a good shot at seeing stellar short-term returns if Take-Two’s next several big releases go off without a hitch (and with minimal delays). Yet investors should consider simply passing on this company in favor of its video game stock rival.

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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