In this piece, I used TipRanks’ comparison tool to evaluate two gaming stocks, Roblox Corp. (NYSE:RBLX) and Take-Two Interactive Software (NASDAQ:TTWO), in order to determine which is better.
Roblox is up an astonishing 46% year-to-date, bringing its 12-month return into the green at 18.5%. Meanwhile, Take-Two Interactive is up 21% year-to-date but remains in the red for the last 12 months, off 8%.
Neither Roblox nor Take-Two was profitable in their recently reported earnings periods. Furthermore, Roblox is trading at a price-to-sales (P/S) ratio of 11.3, while Take-Two Interactive is at a P/S of 4.3. Meanwhile, the interactive home entertainment industry is trading at a trailing price-to-sales (P/S) ratio of 4.7 versus its three-year average P/S of 6.9.
Analyzing both companies’ valuations and fundamentals reveals a clear winner.
Roblox (NYSE:RBLX)
Since going public, Roblox has been riding high on hype and the Metaverse factor. However, while the company’s stock price has plunged since its peak of around $142 in November 2021, it remains grossly overvalued, especially after its year-to-date surge. Thus, a bearish view seems appropriate.
Roblox’s average P/S, since it went public in May 2021, has been 20.9, indicating that it’s been relatively overvalued since the very beginning of its publicly-traded life. Hype and investor sentiment have been driving the company’s valuation, which has been divorced from its fundamentals since the very beginning.
Roblox operates a gaming platform that became one of the earliest iterations of the Metaverse. Players can create their own games on the platform and play games created by others. Unfortunately, a review of the company’s fundamentals raises the question of whether it will ever be profitable.
While Roblox generated impressive revenue growth between 2018 and 2021, it never became profitable. In fact, the more revenue the company generated, the more its losses widened. In 2022, Roblox only grew its revenue by 16%, but its losses continued to widen, surpassing $900 million.
The firm’s net income margin plunged from -14% in 2019 to -27.4% in 2020 and then -41.5% in 2022. Also, Roblox was generating positive free cash flow until 2022.
The company spent $426.2 million on capital expenditures last year, which accounted for about half of the increase in losses. The other half appears largely to be the result of higher research and development and selling, general, and administrative expenses.
What is the Price Target for RBLX Stock?
Roblox has a Moderate Buy consensus rating based on nine Buys, five Holds, and three Sell ratings assigned over the last three months. At $44.93, the average Roblox stock price target implies upside potential of 10.3%.
Take-Two Interactive Software (NASDAQ:TTWO)
Take-Two Interactive is far better-established than Roblox, having gone public in 1997. Since then, its stock is up nearly 3,000%, demonstrating the company’s long-term gains and stability. It appears Take-Two’s 2022 loss was just a temporary blip attributable to its acquisition of Zynga, so a long-term bullish view seems appropriate.
Take-Two paid $12.7 billion in cash and stock for mobile game developer Zynga, closing the deal in May 2022. Through that acquisition, which resulted in a net loss of $403.5 million for the last 12 months, the legacy game maker sought to exponentially boost its net bookings from mobile games.
In terms of net margins, Take-Two’s margins are small but moving in the right direction. Its net margin shifted from 9.7% in 2018 to 12.5% in 2019, 13.1% in 2020, and 17.5% in 2021 before tumbling to 11.9% because of the Zynga acquisition.
The Zynga acquisition’s price tag may give investors pause, but it seems like the right move, given NewZoo‘s estimates that mobile gaming now accounts for about half of the global market. While it expects mobile gaming revenues to decline faster than those of other segments due to the expected recession, mobile gaming is here to stay.
Although Zynga has had a bumpy sales history, adding Take-Two’s leadership and long track record of success may smooth things out.
What is the Price Target for TTWO Stock?
Take-Two Interactive Software has a Strong Buy consensus rating based on 16 Buys, five Holds, and zero Sell ratings assigned over the last three months. At $131.45, the average Take-Two Interactive Software stock price target implies upside potential of 5%.
Conclusion: Bearish on RBLX, Bullish on TTWO
Roblox’s and Take-Two’s P/S ratios and fundamentals reveal that the latter is the clear winner of this pairing. One has to wonder if Roblox will ever be profitable, but Take-Two’s net loss was just the temporary result of a pricy acquisition.
Thus, while Roblox deserves a bearish view, Take-Two appears to be an attractive long-term stock. However, investors may want to monitor its valuation, which is changing rapidly. Any major increase from current levels may make Take-Two fairly valued, and better entry points might appear, although there’s no guarantee.
