Earnings

Comparing Zynga Inc. (ZNGA) and Take-Two Interactive Software, Inc. (TTWO)

Zynga Inc. (NASDAQ:ZNGA) shares are up more than 54.47% this year and recently decreased -2.22% or -$0.09 to settle at $3.97. Take-Two Interactive Software, Inc. (NASDAQ:TTWO), on the other hand, is up 121.71% year to date as of 12/18/2017. It currently trades at $109.28 and has returned 1.54% during the past week.

Zynga Inc. (NASDAQ:ZNGA) and Take-Two Interactive Software, Inc. (NASDAQ:TTWO) are the two most active stocks in the Multimedia & Graphics Software industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect ZNGA to grow earnings at a 30.00% annual rate over the next 5 years. Comparatively, TTWO is expected to grow at a 26.31% annual rate. All else equal, ZNGA’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 8.71% for Take-Two Interactive Software, Inc. (TTWO). ZNGA’s ROI is -7.40% while TTWO has a ROI of 6.50%. The interpretation is that TTWO’s business generates a higher return on investment than ZNGA’s.

Cash Flow 




Cash is king when it comes to investing. ZNGA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.04. Comparatively, TTWO’s free cash flow per share was +0.60. On a percent-of-sales basis, ZNGA’s free cash flow was 0% while TTWO converted 3.84% of its revenues into cash flow. This means that, for a given level of sales, TTWO is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. ZNGA has a current ratio of 3.70 compared to 1.30 for TTWO. This means that ZNGA can more easily cover its most immediate liabilities over the next twelve months. ZNGA’s debt-to-equity ratio is 0.00 versus a D/E of 0.04 for TTWO. TTWO is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ZNGA trades at a forward P/E of 29.85, a P/B of 2.11, and a P/S of 4.18, compared to a forward P/E of 22.95, a P/B of 8.12, and a P/S of 6.40 for TTWO. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. ZNGA is currently priced at a -7.24% to its one-year price target of 4.28. Comparatively, TTWO is -13.67% relative to its price target of 126.58. This suggests that TTWO is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for ZNGA and 2.00 for TTWO, which implies that analysts are more bullish on the outlook for ZNGA.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. ZNGA has a beta of 0.75 and TTWO’s beta is 0.80. ZNGA’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. ZNGA has a short ratio of 2.08 compared to a short interest of 1.65 for TTWO. This implies that the market is currently less bearish on the outlook for TTWO.

Summary

Take-Two Interactive Software, Inc. (NASDAQ:TTWO) beats Zynga Inc. (NASDAQ:ZNGA) on a total of 8 of the 14 factors compared between the two stocks. TTWO is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. TTWO is more undervalued relative to its price target. Finally, TTWO has better sentiment signals based on short interest.

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