Better Video Game Stock Buy After E3 2015: Activision Blizzard Inc or Electronic Arts Inc?

Interest in 2015's E3 conference was massive. Streaming service Twitch said that the show attracted 21 million viewers to its site last month, up from 12 million in 2014. And the conference set records on social media as well, with 6 million Twitterposts and 8 million Instagram likes according to the Entertainment Software Association.

Taking E3's popularity as a proxy for video game demand gives us one more reason to believe publishers are in for a huge 2015. Here are a couple more: The release lineup is stacked, next-gen console installed bases are huge, and digital sales are boosting profit margins to the stratosphere. It's no wonder Activision Blizzard (NASDAQ: ATVI) and Electronic Arts (NASDAQ: EA) stocks are both sitting at all-time highs. But which one is the better bet for investors right now?

Electronic Arts EA has momentum on its side. Its profitability leapt past 71% of sales this year, up from 63% in 2012. Operating cash flow has more than quadrupled since 2012 to $1 billion a year.

But management thinks that's just the start. "The digital transformation sweeping the whole industry is still in its infancy," Chief Financial Officer Blake Jorgensen recently told investors. This tectonic shift provides a chance to "grow margins by increasing the proportion of full game downloads, by providing extra content for games, and by taking our IP to mobile platforms," he predicted.

Source: EA.

EA's upcoming release calendar is strong, and it starts with new entries in the blockbuster Madden, NHL, and FIFA franchises. But most of the excitement -- for gamers and investors -- centers around the Star Wars: Battlefront game set for release in November. This shooter attracted huge interest at E3, where executives stressed the game's fidelity to the epic Star Wars franchise. "You can fly X-wings, TIE fighters, and the Millennium Falcon," producer Sigurlina Ingvarsdottir told the crowd. Battlefront could sell as many as 14 million copies, launching a bona fide new AAA franchise for EA in the process.

Activision BlizzardIn contrast, Activision Blizzard is coming off a year in which two of its biggest brands, World of Warcraft and Call of Duty, registered sales declines. Yet the publisher made huge strides in diversifying its portfolio. With help from the likes of Hearthstone and Destiny, it now counts 10 leading franchises in its quiver, up from 5 last year.

And it's not as if Activision's business is struggling. Call of Duty's Advanced Warfare was yet again the top-selling video game of the year as Skylanders kicked in massive software and toy profits. The company booked record earnings last year as digital revenue pushed past 50% of sales.

The next year is all about expanding into new genres, business model, and markets for this publisher. Call of Duty Online is ramping up in China, while Guitar Hero will join Hearthstone to attack the massive market for casual gameplay on smartphones and tablets.

Source: Activision Blizzard.

The most anticipated game in the lineup is of course Call of Duty: Black Ops 3. That title adds several innovations aimed at keeping the franchise fresh and on top of the sales charts as it enters its twelfth year. There's the zombie mode, for example, that promises to boost engagement and digital sales.

ValuationThe two stock valuations have switched places lately, with EA's jumping to over 5 times sales from a low of 1 times sales just three years ago. In contrast, investors can snap up Activision for 4 times trailing revenue, a slight discount to last year's price.

EA PS Ratio (TTM) data by YCharts

Wall Street seems to be betting on a home run for EA with Star Wars. And the title's strong reception at E3, along with hefty preorder sales, suggests that's likely. But investors who prefer to own a more diversified software lineup at a cheaper price should consider Activision Blizzard.

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Demitrios Kalogeropoulos owns shares of Activision Blizzard. The Motley Fool recommends Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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