On June 24, analysts from Jefferies upgraded their ratings the two of the biggest gaming companies in the world, Take-Two Interactive Software, Inc. (NASDAQ:TTWO) and Electronic Arts Inc. (NASDAQ:EA), to ‘Buy’ ratings from ‘hold’. Let take a look at the two companies and see what Jefferies likes about them, and which, if any, is the better investment.
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Comparing Electronic Arts Inc. and Take-Two Interactive may be a bit tricky as the two companies are not exactly a mirror of the other. Electronic Arts has a market cap of $21.29 billion, while Take-Two Interactive is a light weight by comparison with its $2.42 billion cap. Electronic Arts, based in Redwood City, California and founded in 1982, is the world’s third-largest gaming company by revenue. New York-based Take-Two Interactive, famous for, among other things, its Grand Theft Auto series, was founded in 1993 and incorporates Rockstar Games, 2K Games and 2K Sports.
Take-Two Interactive Software, Inc. (NASDAQ:TTWO), which posted earnings per share for the first quarter of $0.35 has experienced slow growth on the NASDAQ this year, being up by just 1.89% year-to-date, though by a much more robust 31.19% during the last year. With that return, Take-Two Interactive is well below its rival Electronic Arts Inc. (NASDAQ:EA), which has gained an impressive 43.95% so far this year and 86.57% during the last year. The price earnings (P/E) ratios partly explain why; while Electronic Arts has a P/E of 25, Take-Two Interactive has a goose egg, due to the fact that it is posting losses. Analysts do believe that Take-Two Interactive will post earnings of $1.04 per share for 2015 however, implying a P/E of 27.
Let’s take a look at the insider activity and see if it can reveal some major differences between the prospects of the two gaming companies. On June 22, Chief Talent Officer Gabrielle Toledano dumped 8,000 shares of Electronics Arts, representing roughly 6% of her total stake in the company. Some weeks earlier, on the opposite coast, Take-Two Interactive Software, Inc. (NASDAQ:TTWO) General Counsel Daniel Emerson sold 9,150 shares in the company he counsels, leaving him with 53,109 shares. Much more interesting was the insider sales from Take-Two Interactive’s president Karl Slatoff, who on May 27 unloaded 344,666 shares, holding 2.57 million shares or about 2.9% of Take-Two Interactive’s common shares after the sale.
Electronic Arts announced the launch of a number of new games at the recent Electronic Entertainment Expo (E3) event in Los Angeles, gaining the confidence of investors with its strong lineup. Among those were Star Wars Battlefront, Star Wars: The Old Republic, Plants Vs Zombies, Mirror’s Edge Catalyst, Need for Speed, and a number of new games in its various sports franchises, including NFL 16. Given the strong market position for those games, analysts are expecting Electronic Arts to continue its positive development on the NASDAQ and hence rank the share as a “Strong Buy” on average. For Take-Two Interactive, the market is expecting it to release DLCs (Downloadable Content) for Independence Day 2.0 and III-Gotten Gains, and possibly some online updates to GTA 5. The DLCs are expected to be released in July and August/September, since it is not possible due to practical reasons to launch the two during the same months. Gamers however seem to prefer the DLC for III-Gotten Gains and the market anticipates that the launch will be on or around July 4.
So, what top hedge funds showed interest in these gaming stocks? Philippe Laffont, representing Coatue Management, increased his stake in Electronic Arts Inc. during the first quarter by 77% to 6.55 million shares but had no holdings in Take-Two Interactive. In Take-Two Interactive however, David Einhorn and his fund Greenlight Capital had a great stake of 4.70 million shares, which he left untouched during the quarter. Einhorn did not have any holdings in Electronic Arts Inc. The interest for Take-Two Interactive is solid, with 34 of 730 hedge funds in our database having stakes in the company as of March 31, the same as three months prior. Regarding Electronic Arts, 41 funds had positions on March 31, up from 40 at the end of 2014, indicate a slight increase in optimism heading into this quarter.
Although Electronic Arts has been having a strong last year, it seems like it is still the preferred pick of the smart money, and has a lot going for it. While it has become increasingly maligned among gamers for its love of DLC and DRM, it remains one of the best gaming companies in the world with a huge stable of hit series, and the top gaming stock in the world.
Winner: Electronic Arts (EA)
Disclosure: None
