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Forget Roblox, Buy These 3 Video Game Stocks Instead

Although the demand for video games continues to climb as consumers remain engaged with their devices even as the economy reopens, online entertainment platform provider Roblox (RBLX) has been struggling to strengthen its market position due to its weak fundamentals. In contrast, its competitors Electronic Arts (EA), Playtika (PLTK), and Ubisoft (UBSFY) are strategizing and building new platforms to meet escalating demand. So, we believe these companies are better positioned than RBLX to capitalize on the industry tailwinds. Let's discuss.

The demand for video games remains robust despite people returning to outdoor activities as the end of the COVID-19 pandemic looms and distancing mandates are eliminated. Indeed, the global video gaming market is expected to hit $293.2 billion by 2027, growing at a 9.3% CAGR. 

Despite the favorable backdrop, Roblox Corporation (RBLX), a San Mateo, Calif.-based online entertainment platform provider, hasn’t been able to keep up with industry trends. Although the newly public company has the potential to grow its user base in the long run, the company might not be able to retain its existing users and grow due to its weak financials. In its last reported quarter, RBLX’s net loss increased 80.5% to $134.22 million, and its loss from operations surged 85.1% to $135.06 million. The stock has declined 5.1% over the past month.

Conversely, video game companies Electronic Arts Inc. (EA), Playtika Holding Corp. (PLTK), and Ubisoft Entertainment (UBSFY) are likely to experience a spike in sales because they are investing extensively in their R&D to introduce new games aligned with consumers' interests that will also enhance the overall experience.

Since these three companies have a lot of room to grow, we believe they are better bets now.

Electronic Arts Inc. (EA)

EA creates and publishes games, content, and services for a variety of platforms, including consoles, PCs, smartphones, and tablets. The company's games and services are built on a portfolio of intellectual property that includes well-known brands that include FIFA, Madden NFL, Star Wars, Battlefield, Sims, and Need for Speed. EA is based in Redwood City, Calif.

Last month, EA acquired Warner Bros. Games’ Playdemic Ltd. for  $1.4 billion in cash. The purchase was primarily  intended to assist EA extend its  sports portfolio and speed its  growth in mobile, allowing it to reach more people worldwide with more  games and content.

During the fiscal period ended March 31, 2021, EA’s net revenue increased marginally year-over-year to $5.63 billion. Its net cash from operating activities surged 7.6% to $1.93 billion over this period. The company’s cash and cash equivalents grew 39.6% year-over-year to $5.26 billion.

A $6.38  consensus EPS estimate for the current year represents an 11% increase year-over-year. Furthermore,  EA has an impressive earnings surprise history; it beat consensus EPS estimates in each of the trailing four quarters. The $7.39 billion consensus revenue estimate for its fiscal year 2022 represents a 19.5% increase from the same period last year. The stock has gained 14.4% over the past nine months.

EA's POWR Ratings reflect this promising outlook. The POWR Ratings assess stocks by 118 different factors, each with its own weighting. EA has a B grade for Value and Quality. Within the Entertainment-Toys & Video Games industry, it is ranked #9 of 23 stocks. To see more of EA’s component grades, click here.

Playtika Holding Corp. (PLTK)

PLTK is a mobile game developer with a platform that  supports a range of games, provides live game operation services and unique technologies. The company owns and administers  15 games,  including free-to-play mobile games. Apple, Facebook, Google, and other online and mobile platforms are used by the company to distribute its games.

In March, PLTK announced that it has entered a $1.9 billion seven-year Term Loan B, expanding its revolving credit facility to $600 million with a new five-year term, and completed its previously announced $600 million offering of eight--year senior unsecured notes. The company plans to use the offering’s net proceeds along the new loans  to repay  existing loans and for other general corporate purposes.

For the first quarter, ended March 31, 2021, PLTK reported $638.9 million in revenue, which represents a 19.6% year-over-year increase. Its operating income surged 15.1% year-over-year to $130.3 million. Its cash and cash equivalents grew 604.4% from their year-ago value to $966.4 million. The company's adjusted EBITDA increased 38.6% from its  year-ago value to $258 million over this period.

PLTK is expected to generate 10.3%  revenue growth  for the current year. Its EPS is estimated to increase 245.8% year-over-year to $0.83 in fiscal 2021. The stock has gained 13.8% over the past three months.

PLTK's strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. The stock also has a B grade for Value and Quality. In the Entertainment-Toys & Video Games industry, it is ranked #1 of 23 stocks.

In total, we rate PLTK on eight different levels. Beyond what we've stated above, we have also given PLTK grades for Sentiment, Growth, Momentum, and Stability. Get all the PLTK ratings here.

Ubisoft Entertainment (UBSFY)

Headquartered in Montreuil, France, UBSFY develops, publishes, and distributes video games throughout the world in both physical and digital forms for consoles, PC, smartphones, and tablets. The company creates software that includes  scenarios, layouts, and game rules, as well as design tools and game engines.

This month, Sustainalytics, a leading provider of environmental, social, and governance (ESG) ratings,  ranked UBSFY among the top 3% of companies in the Software & Services Industry, among the top 5% of companies in the Entertainment Software Segment, and among the top 6% of all 14,142 companies covered in its 2021 ESG Risk report. This recognition should help the company achieve its long-term commitment to making a  global positive impact.

For its  fiscal year ending March 31, 2021, UBSFY reported €2.22 billion ($2.63 billion) in sales, which represents a 39.4% year-over-year increase. Its operating income came in at €289.4 million ($381.83 million), compared to a  €59.5 million ($70.28 million) operating loss  in the prior-year period. Its net income came in at €103.1 million ($121.78 million) for this period, compared to a €125.6 million ($148.35 million) net loss in fiscal 2020. The company’s EPS came in at €0.85 ($1), compared to a loss per share of €1.12 ($1.32) in the prior-year period.

UBSFY’s EPS is expected to grow 16.1% year-over-year to $1.6 next year. Analysts expect UBSFY's revenue to increase 1.6% year-over-year to $33.12 billion in  2022. UBSFY's stock has gained 3.3% over the past month.

It is no surprise that UBSFY has an overall B rating, which equates to Buy in our POWR Ratings system. The stock also has a B grade for Growth, Value, and Stability. In the same industry, it is ranked #2 of 23 stocks.

In addition to the POWR Ratings grades we  have just highlighted, one  can see the UBSFY ratings for Quality, Sentiment, and Momentum here.

EA shares were trading at $140.56 per share on Thursday afternoon, down $2.39 (-1.67%). Year-to-date, EA has declined -1.88%, versus a 16.10% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.


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