Take-Two Stock: Fairly Valued (NASDAQ:TTWO)

Grand Theft Auto Video Game Rakes In 800 Million Dollars Within One Day Of Sales

Mario Tama

Investment Thesis

Due to a decline in video game sales, the gaming industry is currently experiencing significant challenges and that has driven Take-Two’s (NASDAQ:TTWO) stock price down 30% YTD. However, I believe that if management’s investments are proven to be successful, the company might experience tremendous growth both in revenue and net income.

But is that enough to drive the stock price to new all-time highs? Keep reading to find out.

How Does TTWO Make Money?

Take-Two Interactive Revenue Growth

marketrealist.com

Take-Two Interactive Software, is a video game company that primarily creates and releases goods through the Rockstar Games, 2K, Private Division, and T2 Mobile Games divisions. Its products are made for mobile devices, personal computers, and gaming 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 revenue:

1. Console Games

Video games for console gaming platforms, such as Sony’s (SONY) PlayStation 4 and PlayStation 5, Microsoft’s (MSFT) Xbox One and Xbox Series XS, and Nintendo’s (OTCPK:NTDOY) Switch, are referred to as console games. Approximately 71% of Take-Two Entertainment’s revenue this year came from console games.

2. PC Games

Video games that are played on a personal computer (PC) as opposed to a gaming console are known as PC games. Its distinguishing features include more user-determined and different gaming hardware and software, as well as generally higher input, processing, visual, and audio output capacities. Approximately 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. Despite the fact that mobile games are free to play, money is made by selling in-game virtual products to players. Additionally, TTWO encourages in-game advertising and places banners outside of its gaming portals. Approximately 12% of Take-Two Entertainment’s revenue this year came from mobile games.

Grand Theft Auto Franchise

Grand Theft Auto V

store.playstation.com

Grand Theft Auto 5 is the best-selling console/PC-only game of all time. As of 2022, GTA V has sold 170 million copies over three console generations and PC.

GTA 5 became the most successful entertainment release in history when it earned Rockstar and Take-Two billions more. It was the fastest entertainment release across all mediums to surpass $1 billion in sales.

When GTA V was realized on September 17 of 2013, it made the next year’s revenue skyrocket, driving it up 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 of 2024. Bearing in mind what happened with the previous version of GTA, although TTWO has more sources of revenue now, I would still expect to see a tremendous increase in the company’s sales in 2025 for such an eagerly anticipated video game.

Earlier this year, Take-Two completed its $12.7 billion acquisition of mobile games giant Zynga. Take-Two, the publisher of well-known titles like Grand Theft Auto likely wants a piece of that mobile money. At the time of the deal, it stated in an investor presentation that it intended to work with Zynga to bring more of its brands to mobile platforms.

As Take-Two is recognized for console and PC games and Zynga mainly created the mobile gaming genre, the acquisition unites two gaming giants. Despite the fact that Take-Two currently owns a number of mobile game titles and has extended its franchises there, this will give the business a far larger holding in the market.

Although the company’s revenue from mobile games currently represents only a small portion of the whole turnover that it generates, this acquisition could help the company increase the revenue from mobile games at a faster pace and end up with it being a crucial part of the business’s operations.

Valuation

TTWO Valuation

Seeking Alpha

As shown above, Take-Two scored a D in Seeking Alpha’s valuation model. The company had a pretty poor score in almost every single metric and most of them show that the company is overvalued even based on its competitors. However, the company might deserve this premium for a couple of reasons:

1) High growth over the past years.

TTWO revenue growth

TTWO IR

Take-Two has a Net Bookings CAGR of 14% since 2018 while the global video game market has been growing at a CAGR of almost 6% over the same time period.

2) High growth over the next years

Take-Two not only has been growing its revenue at a decent pace throughout the previous years but analysts also estimate that the company’s revenue is going to grow by 72.94%, 31.5%, and 10.22% in the fiscal period ending in March 2023, 2024, and 2025 respectively.

3) Moat

Although the company has some strong competitors, it has developed some video games, like GTA and NBA2K, that have brought many loyal customers for many years, and the scenario that these games lose their popularity to a competitor’s video game is pretty unlikely.

Valuation Forecast

TTWO analysis

Author’s Calculations

For TTWO I estimated a revenue CAGR of 12.2% for the next 6 years. This includes a conservative projection of 9% CAGR for the years 2022-2024 and a more aggressive one for 2025-2028 as GTA VI will have been realized and I expect it to be a game changer for the company. I kept the FCF margin about the same as it was in 2021 as the company has already reached a maturity stage so I don’t expect margins to increase dramatically from here; I only added a 2% as the company benefits from economy of scale. I continued by adding 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. Factoring in the risks that come with buying this stock, I would say that it is fairly priced at the moment.

Risks

GTA VI

Although GTA VI is a highly anticipated game for a lot of gamers, it might end up being a flop. I don’t consider this a probable scenario, but until the game is released it is a possible one. If TTWO doesn’t achieve to create an appealing video game for its customers, it will have a huge impact on both its revenue and profit.

Competition

The main competitors of Take-Two Interactive Software are Activision Blizzard (ATVI) and Electronic Arts (EA). All three companies have developed amazing games throughout the years, but in an environment where the company that survives is the one that adapts to the customer’s needs the best, TTWO might lose some market share to these and other competitors if the company’s management doesn’t manage to execute correctly.

Conclusion

Summing up, although Take-Two may seem high-priced at its current valuation of $20 billion, a successful GTA 6 release will make the stock worth its money. However, I continue to exercise caution. The stock market is quite volatile and shares will probably fall even more to a place where it becomes a great deal. I’ll keep a careful eye on TTWO, and if it gets any cheaper, I might start a position there as I don’t think it is far away from being worth buying.

For now, at this price and factoring in the risks that come with buying TTWO, I rate the stock as a HOLD.

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