The gaming industry is set to continue to expand at a compound annual growth rate of roughly 9% in the coming years. Furthermore, user engagement and spending on gaming have remained elevated above pre-COVID-19 levels despite re-openings. With the trend set to benefit these two companies, we ask if Zynga (NASDAQ: ZNGA) or Activision Blizzard (NASDAQ: ATVI) is a better buy?
Zynga: Bull vs Bear arguments:
Zynga is a social game developer that primarily focuses on mobile games and is the creator of hit mobile games such as ‘Farmville’, ‘Zynga Poker’ and more. The company was founded in 2007 with the mission of “connecting the world through games”.
Zynga reported record Q2 revenue in 2021 of $720 million, an increase of 59% year-over-year (YoY) with gross margins of 65%. Its advertising revenue also continued to increase and remained steady at roughly 18% of revenue, and it continues to grow this segment with several acquisitions in recent quarters. Zynga also posted a profit of $28 million, smashing its guidance of a loss of $28 million.
Zynga is also seeing improved user acquisition costs along with strong engagement and monetization. It reported a record 41 million daily active users (DAU’s) and its best-ever monthly active users (MAU’s) of 205 million, increasing by 87% and 194% YoY, respectively.
Zynga should continue to benefit from the mobile gaming trend and smartphone adoption globally in the coming years. It has also adapted from mainly social network games such as ‘Farmville’ on Facebook to hyper-casual and cross-platform games. This shift was made after Zynga experienced slowing growth before Frank Gibeau becoming CEO in 2016. Gibeau has also made several acquisitions since becoming CEO which has fueled growth.
Its multi-pronged growth strategy should significantly expand its total addressable market going forward, and Gibeau stated, “We believe we can double the value of the company in the next few years”.
However, it has been a mobile-first company since its inception and its push into cross-platform games will create new challenges and opportunities. These cross-platform games are likely to have higher expectations and are more complex than purely mobile games, creating a greater execution risk.
Zynga also continues to grow through acquisition which has considerable execution risk despite having a successful track record in recent years. The company is also operating at a loss which it forecasts to be -$0.12 per share in fiscal 2021.
Activision Blizzard: Bull vs Bear arguments:
Activision Blizzard owns some of the most successful franchises such as ‘Call of Duty and ‘World of Warcraft’. In its recent earnings call, management stated that “we see a long-term trend of more people gaming than ever before across genres, platforms, business models and geographies”.
In Q2 2021, Activision Blizzard beat analyst expectations with revenue of $2.3 billion, an increase of 19% YoY, with its Activision segment making up the largest portion of revenue. Activision is also profitable, reporting a net income of $876 million, and, on top of this, pays an annual dividend.
Activision’s mobile segment, King, continued to perform and achieved record segment revenue growing 15% YoY in Q2. King represented over half of the company’s MAU’s with 225 million in the quarter. It continues to expand its payer base with seasonal content for its hit games such as Candy Crush. It launched ‘Call of Duty Mobile’ in China in late 2020, fueling growth, and is set to exceed $1 billion in consumer spending in fiscal 2021. There are also a number of mobile games in the pipeline that are part of larger franchises such as ‘Diablo Immortal’ and a new mobile game in the ‘Call of Duty’ universe. Activision’s exposure to mobile gaming is an exciting area for growth outside of its traditional PC and console games.
The company has faced workplace culture issues, which led to California’s Department of Fair Employment and Housing filing a lawsuit alleging widespread, gender-based harassment and leading to executive changes in the Blizzard segment. The company culture is an essential factor to consider when making an investment decision and the recent scandal is a concern.
So, which stock is a better buy right now?
Although Zynga appears to be going in the right direction under Gibeau, Activision Blizzard appears to be the better investment today despite its challenges. This is due to it being more established in the gaming space with a diversified revenue stream and a larger mobile segment.
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Contributing Writer at MyWallSt
Colm's favorite stock is Virgin Galactic as it is representative of his visions for our world in the future.