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The main video game companies are currently in a good position. According to SuperData, spending on digital games hit a record $ 10 billion in March, fueled by the fact that everyone is home as a result of the COVID-19 pandemic. But these major gaming companies still have plenty of opportunities for long-term growth in a promising industry.
Activision Blizzard (WKN: A0Q4K4) has some of the most popular game series in the industry, including Call of Duty, World of warcraft and the Candy crushGames for mobile devices. The company had a player base of more than 400 million active users at the end of 2019.
Nintendo (WKN: 864009) It is expected to deliver solid numbers for the quarter that ended in March. The Nintendo Switch video game system has been sold out for the past few weeks after the game’s success. Animal Crossing: New Horizons It had been published. He led the sales charts among video games last month.
I personally own stocks in both stocks, but let’s compare these video game competitors to see which is the best long term investment.
Crucial differences
Activision Blizzard and Nintendo are two different types of video game companies. The most obvious difference is that Activision focuses on creating games, while Nintendo generates the majority of its annual sales with hardware, primarily the Nintendo Switch. Hardware sales accounted for 55.6% of Nintendo’s profits in the nine-month period ending December 2019. Activision has had a higher operating margin than Nintendo in the past decade, largely due to lower margins. that hardware generates compared to game sales.
Chart: Activision Blizzard and Nintendo sales in billions of dollars, over twelve consecutive month periods (YCharts data)
However, as you can see, Nintendo’s operating margin has steadily increased as hardware sales decline as a percentage of sales. Nintendo Switch hit the market in 2017 and sold 52.5 million units, but it’s getting harder for Nintendo to keep growing as it has to sell more and more hardware units every year to maintain the same level of growth.
As you can see from this chart, Nintendo’s sales growth is beginning to stabilize.
Chart: Nintendo’s revenue growth rate based on a twelve-month period (YCharts data)
Nintendo’s prediction of the pre-coronavirus crisis predicted sales growth of 4% for fiscal year 2020 (which ended in March). Depending on how strong foreign exchange sales are reflected in the books in March, this forecast could be exceeded.
Additionally, Nintendo’s digital sales have reached nearly a third of total revenue. These include Nintendo Switch online subscriptions, downloadable content, and digital versions of game packs sold directly to the Switch device through the Nintendo eShop. Further growth in digital sales should continue to benefit Nintendo’s profitability.
On the other hand, Activision Blizzard generated 53% of its revenue from in-game content, such as virtual items that players purchase in-game. That means that, unlike Nintendo, Activision doesn’t have to release new games as often to generate sales.
Nintendo’s business relies heavily on console hardware cycles that take five to seven years to complete. Sales of a new console skyrocketed in the first few years after launch, as was the case for the Wii console in 2006 and the switching console in recent years. But finally the growth curve flattens out.
For this reason, I think Activision Blizzard basically has a better positioned business model. You can still generate good sources of income with players from World of Warcraft, an online multiplayer title that has been around since 2004. Overwatch and Hearthstone have also had active player bases since their debut a few years ago. The only game Activision releases annually is Call of Duty, which is usually one of the best-selling games of the year.
Overall, Nintendo’s reliance on hardware innovations makes its future growth path more challenging than that faced by Activision. In comparison, Activision can develop new content for existing games and occasionally launch a new series of games.
We will examine below how this strategy has resulted in much higher returns for Activision Blizzard shareholders.
Growth is crucial if the bottom line is that more will come out
The following chart illustrates the sales growth of the two companies in the last ten years. While Activision saw a gradual improvement in sales over time, Nintendo’s revenue plummeted in the early part of the decade when the introduction of the Wii-U console failed to gain an enthusiastic audience.
Chart: Compared operating margins (YCharts data)
While Nintendo has grown its revenue faster than Activision since the introduction of the Switch three years ago, Activision has a number of new games that should drive its results in the next five years.
For example, the company has been hugely successful with Call of Duty: Mobile, a free title that reached over 150 million installs after its launch in October 2019. In March, the company released Call of Duty: Warzone, a new free Battle Royale shooter game that created 50 million new player accounts. There is a great deal of momentum behind the Call of Duty series of games, and Activision is able to expand its monthly active users by 2020, giving the company a larger audience. As a result, opportunities to generate additional income are continually expanding, which will have a positive impact on the company.
Additionally, the administration has numerous projects in development, including Overwatch 2 (50 million original copies of Overwatch sold). We are also preparing to launch Diablo 4 and a mobile version called Diablo: Immortal. These are descendants of a very popular game series, many of which will likely sell millions after launch.
Activision Blizzard has focused on developing mobile versions of some of its most popular product lines to take advantage of the rapidly growing market for mobile games. Over the next five years, the company has the ability to accelerate sales and profit growth again. At Nintendo, on the other hand, businesses are starting to stagnate due to saturation with switching devices.
Final judgment
Probably already obvious, but I’ll say it again very clearly: I think Activision Blizzard will be the best long-term investment. This diagram summarizes why:
Chart: Long-term relative price development (YCharts data)
In the past two decades, the returns between the two stocks have not been nearly the same. Nintendo’s lower performance reflects the cycle of successes and failures in console releases. The Japanese game maker has valuable brands like Mario and Zelda and should continue to generate positive returns, but Activision has a better success rate and offers phenomenal returns for long-term investors.
Activision Blizzard CEO Bobby Kotick has steered the company on the right track. For example, it received the orchestration of the Activision-Blizzard merger in 2008. Kotick was also willing to discontinue certain product lines that weren’t generating a good return on investment, including Guitar Hero in 2011 and Destiny in 2018. The company has demonstrated For many years you can take advantage of the great opportunities in the industry. These include the increasingly popular first-person shooter segment with the original 2003 Call of Duty and newer e-sports with the Overwatch League.
The next ten years should be equally rewarding for investors as the company continues to expand in the area of mobile gaming, which is the fastest growing market segment in global game sales.
Still, Nintendo is still a good investment, which is why I have some stocks. But if you are looking for a player with an optimal position in the video game industry, Activision Blizzard should be your first choice: you may still think about adding Nintendo stocks later.
The subsequent game action duel: Activision Blizzard vs. Nintendo first appeared in The Motley Fool Germany.
This article was written by John Ballard in English and published on Fool.com on April 26, 2020. It has been translated so that our German readers can participate in the discussion.
John Ballard owns shares in Activision Blizzard and Nintendo. Motley Fool owns Activision Blizzard stock and recommends Activision Blizzard. The Motley Fool recommends Nintendo.
Motley Fool Germany 2020
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