Take-Two Interactive: Strong Game Lineup And Growth Potential

Investment Thesis

Earlier in June, I covered Take-Two Interactive Software, Inc. (NASDAQ:TTWO), where I covered TTWO's strong franchise and growth potential. Today, I will be discussing the company's recent result, the future outlook, and why I still remain bullish on the company despite some macro concerns and the stock's current valuation. I believe TTWO is uniquely positioned for growth with a rebound in gaming industry growth and the company's strong positioning with top-tier franchises. The success of GTA VI could boost TTWO's net bookings. The company's focus on increasing recurring consumer spending in Rockstar Online and NBA 2K positions it for substantial profit growth over the next 3-4 years, making it stand out in the industry and deserving of a higher valuation compared to its peers. I remain bullish on the stock and reiterate my buy rating on the stock.

Q1 2024 Review and Outlook

TTWO bookings in the quarter were 2% lower than expected, and its earnings per share was 6 cents below consensus estimates. Despite falling slightly short of Street's expectations, the company's bookings were slightly above its own guidance. This was partly due to the strong performance of games like GTA 5, GTA Online, and NBA 2K23. Zynga, on the other hand, met expectations and continued to see growth in advertising revenue, which increased by 11% YoY. TTWO is committed to expanding its direct-to-consumer (DTC) efforts in its mobile gaming portfolio, which will help improve gross margins. The change in the promotional schedule for NBA 2K23, with more promotions happening in the first quarter rather than the second, contributed to the second-quarter bookings guidance, implying negative year-over-year growth.

Regarding Red Dead, NBA 2K, and GTA franchises, the company noted that the current economic environment is leading consumers to established and trusted franchises, which bodes well for TTWO since it owns three of the top ten console franchises: GTA, Red Dead, and NBA 2K. NBA 2K23, in particular, achieved its second-highest sell-through ever and experienced 11% year-over-year growth, with strong engagement statistics. GTA Online also saw increased player engagement due to a June update, and other games in the portfolio, such as Empires & Puzzles and Hit it Rich, showed positive performance metrics as well.

I believe that although the FY24 guidance is more conservative, the company's strong lineup of games and the continued success of its premium titles will persist beyond the pandemic. Even in the face of economic uncertainty and short-term mobile challenges, I believe the upcoming release of the next GTA game, which I anticipate will happen in FY25, will serve as a significant catalyst for the company's stock.

Gaming-Industry Growth Set to Rebound

In 2022, the video game industry experienced its first decline in sales growth in over a decade, but the strong engagement levels seen this year indicate a potential rebound. Microsoft's impending acquisition of Activision Blizzard stands to consolidate some of the most powerful gaming franchises. China and South Korea are keen on entering the console and AAA gaming market. The metaverse is attracting investments despite delayed returns, while mobile gaming remains a promising avenue. The outlook for the gaming industry suggests a recovery and growth in sales, with the possibility of total industry revenue increasing by 8% year-over-year. Mobile gaming is expected to see a substantial resurgence, with console sales growing, driven by improved availability and strong game releases. Supply chain challenges that affected console availability during the pandemic are anticipated to be resolved this year, as evident from strong sales of PS5 and Xbox Series X/S, outperforming their predecessors like Xbox One in recent months.

GTA 6 Re-launch will boost online bookings

GTA is undeniably one of the top-tier franchises in the video game industry, with GTA 5 having sold over 170 million units to date. However, while the majority of the gaming industry's revenue now comes from in-game purchases, I believe GTA Online at present is severely under-monetized and is a large opportunity for both bookings and earnings growth, particularly as I believe it will be updated and re-launched along with the release of GTA 6. Despite games like Fortnite introducing new monetization strategies like the Battle Pass and limited-time items, which became highly successful in 2018, GTA Online's monetization has remained largely unchanged since its launch in 2013, with players primarily able to purchase virtual currency within the game.

Valuation

TTWO is currently trading at around 18x forward 2025 earnings. As I mentioned in my previous article, the premium compared to peers like Electronic Arts Inc. (EA) and Activision Blizzard, Inc. (ATVI) is justified given the company's continued growth and GTA's monetization potential. Take-Two is currently trading based on its multi-year outlook, which I believe limits its potential for significant gains over the next 12 months. TTWO's robust pipeline of over 62 games also holds the potential to yield additional titles with over $1 billion in sales in the coming years. The company's focus on increased recurrent consumer spending in Rockstar Online and NBA 2K positions it for significant margin expansion over the next 3-4 years, making it a standout in the industry, deserving of a valuation premium compared to its peers. As a result, I remain bullish on the stock and reiterate my buy rating on the stock.

Risks to Target

If the new monetization approach for Grand Theft Auto Online fails to meet expectations and Take-Two Interactive doesn't release games as frequently as its competitors, it could lead to financial challenges for the company, potentially impacting its stock performance. Furthermore, if Microsoft Corporation (MSFT) acquires Activision, it could have negative consequences for the gaming industry. Moreover, in a challenging economic environment, consumers tend to allocate their limited disposable income toward eagerly awaited game launches and engaging live services that capture most of their playtime. Hence the topline growth can be hampered if the macro environment continues to worsen.

Conclusion

After acquiring Zynga, Take-Two Interactive now has a broader portfolio of mobile games in addition to its well-known PC and console titles, such as Grand Theft Auto, NBA 2K, and Red Dead Redemption. I believe that TTWO is in a unique position for growth, especially considering the expected resurgence in the gaming industry and the company's strong foothold with top-tier franchises. I believe the stock's current valuation is justified compared to peers and re-iterate my buy rating on the stock.