Is Zynga A Better Bet Than Activision Blizzard?

ATVI: Activision Blizzard logo
Activision Blizzard

Activision Blizzard’s stock (NASDAQ:ATVI) has gained by close to 30% since early February after the WHO declared the coronavirus a global health emergency, while Zynga’s stock (NASDAQ:ZNGA) has fared much better and gained 56%. The lockdowns and social distancing norms being implemented in various parts of the world has meant an increased demand for gaming, as people are eschewing more public forms of entertainment. This will likely have a positive impact on the business of both the companies. That said, we believe Zynga will likely fare better than Activision Blizzard because of its continued expansion of gaming portfolios through acquisitions, while Activision Blizzard banks on its well established and top selling games, including Call of Duty and World of Warcraft.

Our conclusion is based on our detailed dashboard analysis, ‘Is Activision Blizzard Expensive Or Cheap vs. Zynga?‘, wherein we compare trends in key metrics for the two gaming companies over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.

Zynga Will Likely Outperform Activision Blizzard Over The Coming Months

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Zynga’s P/E based on 2019 earnings has increased from over 18x in 2019 to under 27x currently, while Activision Blizzard’s multiple has grown from 26x to 33x. The growth in multiples for both the companies can be attributed to a growth in gaming demand in the current period. Zynga, in particular, has been riding high with its acquisitions over the recent years, including gaming portfolios of Small Giant Games, Gram Games, and more recently Peak Games. The company’s brand portfolio has expanded meaningfully to include popular franchises, such as Merge Dragons!, Empires & Puzzles, Toon Blast, and Toy Blast, among others. Zynga over the recent years has delivered strong sales as well as bottom line growth, and this trend is expected to continue with the increased focus on live services in games.

Activision Blizzard’s multiple, on the other hand, appears high, considering that it is currently at the highest level of the last 4 years and it is roughly 95% above the figure at the end of 2018. Though Zynga’s P/E is 65% higher from the level seen at the end of 2018, it is still lower than the levels seen in 2016 and 2017. One factor that explains the movement in Activision Blizzard’s multiple compared to Zynga’s is its stronger margins of 27% vs. 25% for Zynga in 2019. Having said that, we believe Zynga’s stock, based on fundamentals and valuation, will likely offer better returns compared to Activision Blizzard over the coming months.

But When Will Broader Economy Recover?

  • The expected timeline for recovery in global economic conditions hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
  • Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Activision Blizzard’s peers. The complete set of coronavirus impact and timing analyses is available here.
  • We believe there will be a recovery in demand for most sectors by late June or early July, with gradual lifting of lockdowns and a gradual rise in number of Covid-19 cases remaining within the manageable capacity of hospitals and care providers.
  • Although gaming companies will report strong Q2 results starting mid-July, it does not mean that gaming demand will see any significant decline by a visible improvement in the situation on the ground.
  • While Zynga looks like a better investment option compared to Activision Blizzard in the long run, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

Overall, Zynga’s stock appears to be a better bet compared to Activision Blizzard. Zynga’s stock has given better returns over the recent months, as well as over the recent years. Going by historical fundamentals, Zynga looks to be a more attractive bet with stronger revenue and earnings growth. To top that, Zynga’s P/E ratio is lower compared to its own P/E ratio over the recent years, as well as lower when compared to Activision Blizzard.

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