Zynga Inc. (NASDAQ:ZNGA) shares are up more than 50.58% this year and recently decreased -0.51% or -$0.02 to settle at $3.87. Take-Two Interactive Software, Inc. (NASDAQ:TTWO), on the other hand, is up 139.93% year to date as of 11/13/2017. It currently trades at $118.26 and has returned 10.52% 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. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. 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 24.64% annual rate. All else equal, ZNGA’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure 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.
Earnings don’t always accurately reflect the amount of cash that a company brings in. 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
Balance sheet risk is one of the biggest factors to consider before investing. 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.
ZNGA trades at a forward P/E of 29.32, a P/B of 2.06, and a P/S of 4.10, compared to a forward P/E of 25.15, a P/B of 8.79, and a P/S of 6.53 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. ZNGA is currently priced at a -9.58% to its one-year price target of 4.28. Comparatively, TTWO is -4.87% relative to its price target of 124.32. This suggests that ZNGA 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
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. ZNGA has a beta of 0.74 and TTWO’s beta is 0.82. ZNGA’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.ZNGA has a short ratio of 2.14 compared to a short interest of 1.42 for TTWO. This implies that the market is currently less bearish on the outlook for TTWO.
Take-Two Interactive Software, Inc. (NASDAQ:TTWO) beats Zynga Inc. (NASDAQ:ZNGA) on a total of 7 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. Finally, TTWO has better sentiment signals based on short interest.