In this piece, I evaluated two gaming stocks, Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA), using TipRanks’ comparison tool to determine which is better.
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Unlike many stocks, Activision Blizzard has been fairly stable over the last year or so, gaining about 1% year-to-date to bring its 12-month return to about flat. Meanwhile, Electronic Arts is up more than 2% year-to-date and down 1% in the past year.
Much of Activision Blizzard’s valuation is tied to Microsoft’s proposed acquisition, which is why it’s been relatively stable despite the wider market volatility. For Activision Blizzard, the critical point of reference is $95 a share, which is what Microsoft intends to pay for the company.
Thus, the standard valuation measures like price-to-earnings (P/E) and price-to-sales (P/S) ratios are unimportant — unless the deal doesn’t complete. However, they do matter for Electronic Arts. As a point of reference, the interactive media industry is trading around its three-year average P/E of 28.3, although it’s trading at a P/S of 4.6, below its three-year average of 6.3.
Activision Blizzard (NASDAQ:ATVI)
A quick glance at Activision Blizzard’s price of around $78 a share suggests immediately that it’s undervalued because if the Microsoft deal goes through, investors will enjoy a price of $95 a share. However, the acquisition is far from a done deal. Nonetheless, for investors wanting to play the odds on the deal going through, a bullish view looks appropriate.
Activision Blizzard is currently what the pros call a special-situation investment. Any bet in either direction on whether the Microsoft deal will complete is part of a merger arbitrage strategy. The current spread, which is the difference between the current price of around $78 and the proposed acquisition price of $95, stands at $17, offering investors a significant discount on Activision Blizzard shares if the deal completes.
Unfortunately, the Microsoft deal faces opposition in the U.K., and U.S. regulators voted to file a lawsuit to block it. In the U.K., the competition regulator initially blocked the merger, but on Thursday, it also published an interim order restricting the companies from buying an interest in each other without its consent.
The European Union is expected to release its decision on the matter on May 15, and several other countries have also approved it. However, if regulators ultimately block the deal, Microsoft has some options, like carving out its cloud gaming service, which could satisfy the U.K.’s concerns.
Both companies hired expensive lawyers to fight for them. They could also be forced to sell their cloud divisions or certain game franchises in order to complete the merger.
Activision Blizzard is trading at a P/E of 32.7 and a P/S of 7.5, suggesting a valuation that’s slightly higher than average without the merger. However, given its long-term stability and strength, it likely wouldn’t be a bad stock to buy and hold for an extended period, which may be the best-case scenario if the merger is blocked.
What is the Price Target for ATVI Stock?
Activision Blizzard has a Strong Buy consensus rating based on 16 Buys, one Hold, and zero Sell ratings assigned over the last three months. At $92.14, the average Activision Blizzard stock price target implies upside potential of 18.1%.
Electronic Arts (NASDAQ:EA)
EA is trading at a P/E of 43.3 and a P/S of 4.6, suggesting it may be overvalued versus its industry and its five-year mean P/E of 33.3 and P/S of 5.9. The valuation and steadily rising expenses suggest a neutral view might be appropriate.
Electronic Arts swung to a loss in its most recently completed quarter while posting mixed results. A review of its financials over the last few years shows rising research & development and selling, general, and administrative expenses.
This trend is common across the tech industry, especially during inflationary periods, but EA’s net income margin has been declining steadily over the last few years. All things considered, it looks overvalued.
What is the Price Target for EA Stock?
Electronic Arts has a Moderate Buy consensus rating based on 10 Buys, nine Holds, and zero Sell ratings assigned over the last three months. At $138.26, the average Electronic Arts stock price target implies upside potential of 10.5%.
Conclusion: Bullish on ATVI, Neutral on EA
Investors who know how to do their due diligence may be able to walk away with a tidy profit on Activision Blizzard in the Microsoft merger if they play their cards right. If the FTC is left as the loan regulatory agency blocking the merger, it may face an uphill battle, but the UK’s final decision is critical.
Thus, Activision Blizzard is a risky merger play, but even if it doesn’t go through, the company looks to be on firm footing over the long term. On the other hand, EA looks overvalued.
