Roblox Corporation (RBLX) and Electronic Arts Inc. (EA) are two established players in the video gaming industry. RBLX, which is based in San Mateo, Calif., 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, Redwood City, Calif.-based EA develops, publishes, and distributes branded interactive entertainment software across various genres for video game consoles, PCs, handheld game players, and cellular handsets worldwide. It also provides online game-related services.

Limited outdoor entertainment and recreation activities helped the video game industry expand its active user base and generate significant returns last year. While increasing vaccination rates and decreasing COVID-19 cases were expected to slow the market this year, video game companies’ efforts to improve software, consoles, content, and graphics helped the industry generate sales worth $4.40 billion in October 2021, up 16% from the prior-year period.

Also, rising interest in metaverse gaming further enhances the industry’s long-term growth prospects. Investor optimism in this space is evident in the Global X Video Games & Esports ETF (HERO) 9.9% gains over the past month, versus the SPDR S&P 500 Trust ETF’s (SPY) 4.8% returns. The global gaming market is expected to grow at a 13.2% CAGR to reach $545.98 billion by 2028. So, both RBLX and EA should benefit.

But while EA has gained 4.9% in price over the past six months, RBLX has surged 51.6%. RBLX is a clear winner with 40.5% gains versus EA’s 7.9% returns in terms of their past month’s performance. But which of these stocks is a better pick now? Let’s 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 focused on building a platform to connect gaming communities. Guilded team has built a powerful platform to connect gaming communities, including tools and features such as tiered voice chat, video chat, integrated calendars, scheduling tools, and launched its bot API to simplify bot development. Both companies are looking forward to providing the best experience to their communities.

On October 1, 2021, EA announced the launch of EA SPORTS FIFA 22, which offers the revolutionary next-gen HyperMotion gameplay technology on PlayStation5, Xbox Series X|S, and Stadia. Keeping in view the huge user base for this game, the company believes the HyperMotion technology offering will not only revolutionize the FIFA franchise, but it will also forever change the sports video game landscape.

Recent Financial Results

RBLX’s revenue for its fiscal third quarter, ended September 30, 2021, increased 102.2% year-over-year to $509.34 million. 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 second quarter, ended September 30, 2021, EA’s net revenue increased 58.6% year-over-year to $1.83 billion. The company’s gross profit came in at $1.33 billion, representing a 54% year-over-year improvement. EA’s operating income was $340 million for the quarter, indicating a 128.2% rise from the prior-year period. While its net income increased 58.9% year-over-year to $294 million, its EPS increased 61.9% to $1.02. The company had $1.63 billion in cash and cash equivalents as of September 30, 2021.

Past and Expected Financial Performance

RBLX’s revenue has grown 115% over the past year, and analysts expect its EPS to remain negative in the current year and next year, and its revenue to increase 184.8% year-over-year in the current year and 16.1% next year. The company’s EPS is expected to grow at a 1.1% rate per annum over the next five years.

In comparison, EA’s revenue has increased 14.4% over the past year. EA’s EPS is expected to rise 20% year-over-year in the current year and 9.4% next year. Its revenue is expected to grow 23.5% year-over-year in the current year and 6.5% next year. And analysts expect the stock’s EPS to grow at 27% per annum over the next five years.

Valuation

In terms of non-GAAP P/E, EA is currently trading at 19.74x, compared to RBLX’s negative 144.40x. And in terms of forward EV/Sales, EA’s 5.38x compares with RBLX’s 22x.

Profitability

EA’s trailing-12-month revenue is almost 3.9 times RBLX’s. EA is also more profitable, with a 73% gross profit margin versus RBLX’s 20.8%.

Furthermore, EA’s 9.9%, 5.7%, and 7.2% respective ROE, ROA, and ROTC compare with RBLX’s negative values.

POWR Ratings

While EA 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, EA has been graded a B, which is consistent with its higher-than-industry profitability ratios. EA’s 73% trailing-12-month gross profit margin is 41.2% 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.

EA has a B grade for Sentiment, which is consistent with favorable analyst estimates. Analysts expect EA’s EPS to grow 20% year-over-year in the current year to $6.90. However, RBLX’s D grade for Sentiment is in sync with negative EPS estimates.

Of the 23 stocks in the Entertainment - Toys & Video Games industry, RBLX is ranked #18, while EA is ranked #2.

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

Note that EA is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.

The Winner

Given the rising demand for video games, the industry is expected to maintain its sales growth in the fourth quarter. Therefore, EA and RBLX should benefit. However, we think its higher profit margins and lower valuation make EA 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 were trading at $125.44 per share on Wednesday morning, up $9.26 (+7.97%). Year-to-date, RBLX has gained 80.49%, versus a 26.60% 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.

More...