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Better Buy: Activision Blizzard vs. Tencent

Activision Blizzard (NASDAQ: ATVI) and Tencent (OTC: TCEHY) are two of the largest video game publishers in the world. Activision Blizzard owns hit franchises like Call of Duty, World of Warcraft, and Candy Crush, while Tencent publishes League of Legends, Honor of Kings, Clash of Clans, and PUBG Mobile. It also owns 40% of Fortnite maker Epic Games and minor stakes in Activision Blizzard, Ubisoft, and other game makers.

Activision Blizzard is a pure play on video games, while Tencent is a diversified Chinese tech giant that also generates revenue from its sprawling social networking, advertising, fintech, and cloud businesses.

Image source: Getty Images.

Both companies benefited from stay-at-home measures throughout the pandemic -- Activision's stock rallied more than 50% over the past 12 months as Tencent's stock surged 80%. But will these high-flying stocks continue climbing after the pandemic passes?

Activision Blizzard faces a rougher landing

Activision Blizzard's total revenue rose 26% year over year to $5.67 billion in the first nine months of 2020. It splits its business into three segments: Activision, Blizzard, and King.

Activision's monthly active users (MAUs) more than tripled year over year to 111 million in the third quarter, with most of that growth coming from Call of Duty: Modern Warfare and Warzone. Playtime on those two games across PCs and consoles rose roughly sevenfold from a year ago.

Blizzard's MAUs declined 9% to 30 million, as aging games like World of Warcraft, Overwatch, and Hearthstone largely treaded water while gamers waited for new expansion packs and features. King's MAUs rose 1% to 249 million as Candy Crush continued growing.

Activision Blizzard's net income surged 73% to $1.69 billion in the first nine months of the year, buoyed by its robust sales growth, expanding margins from digital downloads and in-game purchases, and King's rising ad revenue.

Analysts expect Activision Blizzard to finish 2020 with full-year revenue and earnings growth of 28% and 52%, respectively. But for 2021, they expect its revenue and earnings per share to rise just 2% and 3%, respectively, as the pandemic passes, people play fewer games, and the company laps the launch of Call of Duty: Warzone last March.

Tencent is a better diversified company

Tencent is the world's largest game publisher by annual revenue, but it only generates about a third of its revenue from its gaming business.

Image source: Getty Images.

The rest is split between its social networking business, which sells value-added services and subscriptions across its social networks and streaming media platforms; its advertising business, which sells ads across that ecosystem; and its fintech and business services offerings, which include Tencent Cloud and its payment platform WeChat Pay.

Tencent's total revenue rose 28% year over year to 348.4 billion yuan ($53.8 billion) in the first nine months of 2020. All four of its core businesses grew at double-digit rates during those three quarters, even as the pandemic throttled the growth of its advertising business.

Its gaming unit locked in gamers with hit games like Honor of Kings, Peacekeeper Elite, and PUBG Mobile, while its messaging platform WeChat grew its MAUs 5% year over year to 1.21 billion in the third quarter. Tencent Cloud also remains China's third-largest cloud platform.

Tencent's adjusted net income, which excludes gains and losses from its investments in other companies, grew 37% to 89.5 billion yuan ($13.8 billion) in the first nine months of 2020. Analysts expect its revenue and earnings to rise 38% and 48%, respectively, for the full year.

In 2021, analysts expect Tencent's revenue and earnings to rise 24% and 17%, respectively, as the accelerating growth of its non-gaming businesses (especially advertising) offsets a potential slowdown in its gaming business.

Tencent is the better choice -- but buyers should be careful

Activision trades at 27 times forward earnings, while Tencent has a forward P/E ratio of 38. Tencent is clearly the better buy -- it's more diversified, dominates multiple growing markets, generates stronger growth, and will face a softer landing after the pandemic ends.

But before pulling the trigger, investors should recognize Tencent's risks. China's antitrust regulators are currently scrutinizing its investments, and they could launch a probe against WeChat Pay in the near future. A new U.S. law could also de-list Tencent and other Chinese stocks, even if they trade over-the-counter, if they don't comply with new auditing rules for three straight years.

For an investor willing to accept those risks, Tencent is a good long-term play on China's growing tech sector. But if those risks seem unacceptable, investors might want to consider buying safer Chinese tech stocks instead.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tencent Holdings and recommends the following options: long January 2022 $75 calls on Activision and short January 2022 $75 puts on Activision. The Motley Fool has a disclosure policy.


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