Due to a decline in video game sales, the gaming industry is currently experiencing significant challenges and that has propelled Take-Two (NASDAQ:TWO) share price down 30% YTD. However, I believe that if management’s investments are shown to be successful, the company could experience tremendous growth in both revenue and net income.
But is that enough to drive the stock price to new all-time highs? Read on to find out.
How does TTWO make money?
Take-Two Interactive Software is a video game company that creates and releases products primarily through its Rockstar Games, 2K, Private Division, and T2 Mobile Games divisions. Their products are made for mobile devices, personal computers, and game consoles. The company offers a variety of ways to purchase these products, including physical stores, internet platforms, cloud streaming services, and digital downloads.
TTWO has three (3) sources of income:
1. Console games
Video games for console game platforms, such as Sony’s (Sony) PlayStation 4 and PlayStation 5, from Microsoft (MSFT) Xbox One and Xbox Series XS, and from Nintendo (OTCPK:NTDOY) Switch, are known as console games. Roughly 71% of Take-Two Entertainment’s revenue this year came from console games.
Video games that are played on a personal computer (PC) instead of a game console are known as PC games. Its distinguishing features include more different and user-determined gaming hardware and software, as well as generally greater audio input, processing, display, and output capabilities. Roughly 17% of Take-Two Entertainment’s revenue this year came from PC games.
3. Mobile games
Mobile games are those created specifically for smartphones and tablets. Even though mobile games are free to play, money is made by selling virtual in-game products to players. Additionally, TTWO encourages in-game advertising and places banners outside of its game portals. Roughly 12% of Take-Two Entertainment’s revenue this year came from mobile games.
Grand Theft Auto Franchise
Grand Theft Auto 5 is the best-selling console/PC exclusive game of all time. As of 2022, GTA V has sold 170 million copies across three generations of consoles and PC.
GTA 5 became the most successful entertainment release in history when it made billions more for Rockstar and Take-Two. It was the fastest entertainment release in all media to exceed $1 billion in sales.
When GTA V was made on September 17, 2013, it made the next year income skyrocketed, boosting it by 93.5%, from $1,214 million in 2013 to $2,351 million in 2014.
GTA VI is expected to be released in October or November 2024. Considering what happened with the previous version of GTA, although TTWO has more sources of income now, I would still expect to see a tremendous increase in sales from the company in 2025 .for a long-awaited video game.
Earlier this year, Take-Two completed its $12.7 billion acquisition of mobile gaming giant Zynga. Take-Two, the publisher of well-known titles like Grand Theft Auto, probably wants a piece of that mobile money. At the time of the deal, he stated in an investor presentation that he intended to work with Zynga to bring more of its brands to mobile platforms.
As Take-Two is renowned for console and PC gaming and Zynga primarily created the mobile gaming genre, the acquisition unites two gaming giants. Even though Take-Two currently owns several mobile game titles and has extended its franchises there, this will give the company a much larger share of the market.
Although the company’s mobile gaming revenue currently represents only a small portion of the total revenue it generates, this acquisition could help the company grow mobile gaming revenue at a faster rate and end up being a crucial part of operations. of the business. .
As shown above, Take-Two got a D in Seeking Alpha’s valuation model. The company scored quite low on almost all the metrics and most of them show that the company is overvalued even when compared to its competitors. However, the company might deserve this premium for a couple of reasons:
1) High growth in recent years.
Take-Two has a net booking CAGR of 14% since 2018, while world video game market it has been growing at a CAGR of nearly 6% over the same time period.
2) High growth in the coming years
Take-Two has not only been growing its revenue at a decent pace over the past few years, but analysts also estimate that the company income will grow by 72.94%, 31.5% and 10.22% in the fiscal year ended in March 2023, 2024 and 2025, respectively.
Although the company has some strong competitors, it has developed some video games, such as GTA and NBA2K, which have attracted many loyal customers for many years, and the scenario that these games lose their popularity to a competitor’s video game is quite unlikely.
For TTWO I estimated a CAGR of 12.2% for the next 6 years. This includes a conservative 9% CAGR projection for the years 2022-2024 and a more aggressive one for 2025-2028 as GTA VI will have been made and I expect it will be a game changer for the company. I kept the FHR margin more or less the same as in 2021, since the company has already reached a stage of maturity, so I do not expect the margins to increase drastically from here; I only added 2% as the company benefits from economy of scale. I went on to add a P/FCF of 17, which is significantly lower than the company’s. Five-year average P/FCF, and I ended up with a future price of $289.19 in six years. This price implies an annualized ROI of almost 13% if you buy the stock at $124. Considering the risks involved in buying this stock, I’d say it’s priced fairly right now.
Although GTA VI is a highly anticipated game for many players, it could end up being a flop. I don’t consider this to be a likely scenario, but until the game is released it is possible. If TTWO fails to create a compelling video game for their customers, it will have a huge impact on both their revenue and profits.
Take-Two Interactive Software’s main competitors are Activision Blizzard (ATVI) and Electronic Arts (USA). All three companies have developed amazing games over the years, but in an environment where the company that survives is the one that best suits the customer’s needs, TTWO could lose some market share to these and others. competitors if company management does not. get it to run correctly.
In short, while Take-Two may seem pricey at its current $20 billion valuation, a successful launch of GTA 6 will make the stock worth its money. However, I remain cautious. The stock market is quite volatile and stocks will likely fall further to a point where it becomes a big deal. I’ll be keeping an eye on TTWO, and if it gets cheaper I might start a position there as I don’t think it’s far from worth buying.
For now, at this price and considering the risks involved in buying TTWO, I rate the stock a HOLD.
– Article Written By @ from www.bing.com