Roblox Corporation (RBLX) and Activision Blizzard, Inc. (ATVI) are two established players in the video gaming industry. San Mateo, Calif-based CARBLX develops and operates an online entertainment platform that offers applications and solutions, allowing developers and creators worldwide to build, publish, and operate 3D experiences and other content. In comparison, ATVI in Santa Monica, Calif., develops and publishes interactive entertainment content and services across various gaming platforms, through subscription, full-game, and in-game sales, as well as by licensing software to third-party or related-party companies that distribute Activision and Blizzard products.

The launch of immersive and realistic games, esports competitions on various platforms, and efficient gaming consoles have helped the video game industry generate significant revenues and expand its monthly active user base since the onset of the COVID-19 pandemic, with limited outdoor entertainment and recreation activities acting as a catalyst. While the ongoing vaccination drive and availability of various outdoor activities were expected to slow the industry’s growth this year, the efforts of video game makers to provide captivating content, powerful graphics, and advanced software have helped the industry generate $4.39 billion in sales in October 2021, up 16% from the prior-year period.

Also, a rising interest in metaverse gaming further enhances the industry’s long-term growth prospects. Investor optimism in this space is evident in the Wedbush ETFMG Video Game Tech ETF’s (GAMR) 4.7% gains over the past month, versus the SPDR S&P 500 Trust ETF’s (SPY) 3.6% returns. The global video game market is expected to grow at a 9.7% CAGR to $225.10 billion by 2025. So, both RBLX and ATVI should benefit.

But while ATVI’s shares declined 36.9% in price over the past six months, RBLX has surged 39.2%. RBLX is a clear winner with 47.9% gains versus ATVI’s negative returns in terms of their past month’s performance. But which of these stocks is a better pick now? Let us find out.

Click here to check out our Video Game Industry Report for 2021

Latest Developments

On August 16, 2021, RBLX acquired Guilded, Inc., a privately-held company that is focused on building a platform to connect gaming communities. Guilded team has built a powerful platform to connect gaming communities that includes tools and features such as tiered voice chat, video chat, integrated calendars, scheduling tools. It has also launched its bot API to simplify bot development. Both companies are looking forward to providing the best experience to their communities.

On October 28,  ATVI announced the acquisition of Barcelona-based mobile game developer Digital Legends. It joins ATVI’s growing roster of independent studio teams, supporting the development of an unannounced Call of Duty mobile title. Digital Legends’ expertise in high-quality mobile titles for mobile should help ATVI’s mobile talent pool grow substantially.

Recent Financial Results

For the fiscal third quarter, ended September 30, 2021, RBLX’s revenue increased 102.2% year-over-year to $509.34 million. However, the company’s loss from operations came in at $77.45 million, up 50.3% from the prior-year period. Its net loss was $77.19 million for the quarter, representing a 54.3% rise from its year-ago period. Its loss per share decreased 50% year-over-year to $0.13. The company had $1.93 billion in cash and cash equivalents as of September 30, 2021.

For its fiscal third quarter, ended September 30, 2021, ATVI’s total net revenues increased 5.9% year-over-year to $2.07 billion. The company’s non-GAAP operating income came in at $893 million, up 4.3% from the prior-year period. While its non-GAAP net income increased 2.3% year-over-year to $699 million, its non-GAAP EPS increased 1.1% to $0.89. The company had $9.72 billion in cash and cash equivalents as of September 30, 2021.

Past and Expected Financial Performance

RBLX’s revenue has increased 115% over the past year. Analysts expect RBLX’s EPS to remain negative in the current year and next year. However, its revenue is expected to grow 195.7% year-over-year in the current year and 20.1% next year. The stock’s EPS is expected to grow at a 1.1% rate per annum over the next five years.

In comparison, ATVI’s revenue has increased 18.2% over the past year. ATVI’s EPS is expected to increase 9.8% year-over-year in the current year and 0.3% next year. The stock’s revenue is expected to grow 3.7% year-over-year in the current year and 3.5% next year. Analysts expect the stock’s EPS to grow 13.3% rate per annum over the next five years.

Valuation

In terms of non-GAAP P/E, ATVI is currently trading at 16.02x, compared to RBLX’s negative 137.68x. And in terms of forward EV/Sales, ATVI’s 4.77x compares with RBLX’s 23.50x.

Profitability

ATVI’s trailing-12-month revenue is almost 5.5 times RBLX’s. And ATVI is more profitable, with a 37.6% EBITDA margin versus RBLX’s negative value.

Furthermore, ATVI’s 16.9%, 9%, and 10.6% respective ROE, ROA, and ROTC, compare with RBLX’s negative returns.

POWR Ratings

While ATVI has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, RBLX has an overall D grade, equating to Sell. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.  

In terms of Quality, ATVI has been graded a B, consistent with its higher-than-industry profitability ratios. ATVI’s 72.7% trailing-12-month gross profit margin is 40.6% higher than the 51.7% industry average. In comparison, RBLX’s C grade for Quality is in sync with its lower-than-industry profit margins. It has a 20.8% trailing-12-month gross profit margin, which is 59.7% lower than the 51.7% industry average.

ATVI has a B grade for Value, which is in sync with its lower-than-industry valuation ratios. ATVI has a 2.68x forward Price/Book, which is 0.4% lower than the 2.69x industry average. RBLX’s D grade for Value reflects its overvaluation. RBLX’s 128.07x forward Price/Book is 4661.8% higher than the 2.69x industry average.

Of the 23 stocks in the C-rated Entertainment - Toys & Video Games industry, RBLX is ranked #19, while ATVI is ranked #5.

Beyond what we have stated above, our POWR Ratings system has also rated ATVI and RBLX for Stability, Growth, Momentum, and Sentiment. Get all RBLX ratings here. Also, click here to see the additional POWR Ratings for ATVI.

The Winner

Given the rising demand for video games, both ATVI and RBLX should benefit in the near term. However, its higher profitability, lower valuation, and favorable analyst sentiment we think make ATVI a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Entertainment - Toys & Video Games industry.

Click here to check out our Video Game Industry Report for 2021

RBLX shares rose $2.77 (+2.23%) in premarket trading Friday. Year-to-date, RBLX has gained 82.19%, versus a 24.70% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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