Is Take-Two Interactive Stock A Buy?

Take-Two Interactive Software, Inc (NASDAQ:TTWO) is a New York City-based video game parent company of two of the biggest major publishing labels: 2K Games and Rockstar Games.

It tried adding racing publisher Codemasters to its roster but got outbid by Electronic Arts Inc (NASDAQ:EA).

It’s still shopping for gaming companies, which leads to the investor question: is Take-Two Interactive stock a Buy?

The gaming industry is consolidating following Microsoft’s acquisition of ZeniMax Media; this purchase reflected changes in this new console generation. With no E3, analysts wonder how vertically integrated Sony, Microsoft, and Nintendo will get.

Meanwhile, companies like Google (GOOG), Apple (AAPL), and Amazon (AMZN) are transforming what we use as gaming consoles through their streaming services.

Regardless of the platform, Take-Two kept pushing its content through the pandemic. Its portfolio of gaming IP is deep and includes some heavy hitting franchises for esports, streamers, and casual gamers alike.

So can Take-Two Interactive lead investors to financial high scores or will they need to insert more coins to continue?

Take-Two Interactive Has A Rich History Of Success

Take-Two Interactive is one of the largest publicly traded companies in the world, alongside EA and Activision Blizzard, Inc (NASDAQ:ATVI). It started in 1993 with full motion video games using live actors and found great success.

Soon it was buying properties throughout the video game industry, including a game called Grand Theft Auto. This series would push the company’s revenues over $1 billion by 2003, and it bought Fireaxis Games to takeover Sid Meier’s Civilization series, Irrational Games to buy BioShock, and the WWE 2K series.

This gave it renewed success after almost accepting a buyout from rival EA in 2008. Through the 2010s, the company fought off government regulators and signed a $1.1 billion licensing deal with the NBA for its 2K series.

It also has a partnership with the NBA for an eSports league based on NBA 2K.

Borderlands continues making money in new incarnations, and its 2018 Red Dead Redemption launch was one of the biggest of the year. It pushed out a ton of collections and remastered editions in the pandemic to keep revenue coming.

In August 2020, the company made a much-needed mobile expansion by buying Playdots for $192 million. It increases the footprint it already had through Social Point. This has some investors wondering if Take-Two is worth buying.

Is Take-Two Interactive Stock A Buy?

Take-Two Interactive began the year valued at over $22 billion, which corresponded to a 47x multiple on earnings. This is much higher than Activision Blizzard’s approximately 32x P/E ratio.

TTWO share price fell to a 52-week low of $100 per share but, since then, the stock took off, more than doubling to north of $200 per share alongside the rest of the market.

Its second fiscal quarter for 2021 ended September 2020, and net revenue was $841.1 million. This is down from $857.8 million in the same quarter of the prior year. The series mentioned above, along with PGA Tour 2K21 and Mafia, led the company’s revenue streams.

GAAP net income increased 38 percent year over year to $99.3 million, which comes out to $0.86 earnings per share (EPS). Digital game sales, expansion passes, and in-game purchases increased during the period, and the company expects to end its fiscal year with over $3 billion in net bookings.

The company earned record revenues, driven largely by microtransactions.

This should give it around $400 million in net income for the fiscal year ending March 31, 2021. However, video game stocks gained so much because people were stuck inside during global lockdowns. A reopening economy could have a detrimental effect on Take-Two Interactive’s bottom line.

Take-Two Interactive Margins Could Decline 

Take-Two Interactive (TTWO), along with other video game companies, saved money on some marketing expenses in 2020. This is because major gaming events like E3 were shut down completely.

E3 is one of the biggest video game events, and it can cost $500,000 or more for big publishers like Take-Two to exhibit.

Those costs are only amplified by the launch of a new generation of gaming consoles. This means the company has to ensure games are developed for more platforms, which increases the associated costs.

A recovering economy means many of these expenses will return, and its operating margins will ultimately be affected. And there’s no telling how strong the gaming industry will perform when people return to traveling outside and doing other things.

Not only is the market uncertain, but Take-Two has a controversial history. Many of its games become targets of politicians decrying violence and criminal behavior glorified in video games. It has a complicated relationship with streamers, critics, and the modding community.

That could be enough to drive gamers to a competitor.

Can Take-Two Interactive Competitors Win?

Take-Two Interactive is a video game giant, but it’s not as big as companies like Activision Blizzard (ATVI) and Electronic Arts (EA).

Gaming is as competitive behind the scenes as on screen, and everyone from Valve and Nintendo to Ubisoft, Sony (SNE), Microsoft (MSFT), Google (GOOG), and Apple (AAPL) wants a piece of the action.

And rival developers keep coming up with similar game themes, like the Payday series from Overkill Software and Daybreak Game Company.

However, Take-Two has minimal debt (about $180 million in September 2020) and held about $2 billion in cash and short-term investments. This gives it deep pockets to keep buying out developers.

Is Take-Two Interactive Stock a Buy? The Bottom Line

Take-Two Interactive is one of the biggest video game publishing companies in the country. Its roster of games includes the 2K sports series, Borderlands, Civilization, Red Dead Redemption, and Grand Theft Auto. These are iconic titles in the gaming world.

The company has experienced growth in its digital sales over the past year. It also saved money during a console launch year through the lack of major (and notoriously expensive) marketing events like E3.

If lockdowns continue, its luck could hold out at least into the summer. After that, there’s no telling what expensive opportunities will arise as gaming and esports return to business as usual.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.