Has Take-Two Interactive Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Take-Two Interactive (NASDAQ: TTWO  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Take-Two Interactive.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

4.9%

Fail

 

1-year revenue growth > 12%

(7.8%)

Fail

Margins

Gross margin > 35%

33.4%

Fail

 

Net margin > 15%

(19.9%)

Fail

Balance sheet

Debt to equity < 50%

67.2%

Fail

 

Current ratio > 1.3

2.37

Pass

Opportunities

Return on equity > 15%

(33.3%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

1 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Take-Two Interactive last year, the company has dropped two points, with the company's balance sheet and gross margins taking a hit. The stock has also done poorly, falling about 20% over the past year.

The video game industry has continued to suffer in 2012, as the inexorable migration of gamers from expensive consoles to cheaper mobile-based games has continued. Although Take-Two has its Grand Theft Auto V release coming out early next year to bolster sales, and rival Electronic Arts (NASDAQ: EA  ) has seen record results for its latest NFL installment Madden 13, the recent bankruptcy of THQ is a cautionary tale that even hot franchise offerings can peter out over time.

Take-Two may also see pressure from groups responding to recent violence in school attacks. Activision Blizzard (NASDAQ: ATVI  ) has identified lawsuits from families of victims as risk factors in its quarterly reports, as has Take-Two. In China, Glu Mobile (NASDAQ: GLUU  ) has seen measures taken in an attempt to remove violent and obscene content from games.

Take-Two isn't giving up without a fight, though. In addition to its console-based games, the company has pushed toward new gaming platforms with the knowledge that failing to do so could make it obsolete in the near future. It certainly doesn't have the mobile focus that Zynga (NASDAQ: ZNGA  ) has, but its stock has fared far better, as well.

For Take-Two to improve, it needs Grand Theft Auto V to be the smashing success that everyone expects it will be. Anything short of a blockbuster could hammer the shares even further, and potentially keep Take-Two from getting appreciably closer to perfection anytime soon.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Both Take-Two and Electronic Arts have fallen out of the gaming limelight lately, with Activision and Zynga getting a lot more attention. But for EA, the current environment represents a great chance for Electronic Arts to make a comeback. Our latest research report on the stock breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now, and we'll throw in a year of free quarterly updates as news breaks.

Click here to add Take-Two Interactive to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (4) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 28, 2012, at 8:12 AM, caballote77 wrote:

    How about BioShock Infinite? How about Red Dead Redemption 2?

    Boarderlands has been a success. Should I go on mentioning more successful games they have or will release?

    One can not underestimate what GTA V will mean. This one game will generate more revenue than the current market cap of the company!

    Also who is the largest share-holder in TTWO? I'll let you check the SEC filings to find out... But let's just say he has a history of making money by selling companies or forcing them to change.

    This is one of the most undervalued stocks in the market today. In 6 months, this stock could easily be double of what it is today.

    Also, I hate it when people that don't play videogames talk about mobile gaming making consoles "obsolete". Try Charging them! We console players pay 40 - 60 bucks per game. How much do the gamers of draw me pay to play? NOTHING! it’s free.

    Mark my words: mobile gaming will NEVER make console games obsolete. NEVER!

  • Report this Comment On December 28, 2012, at 3:35 PM, BillStacker wrote:

    To the commenter above:

    I agree that Bioshock Infinite represents significant additional upside for the stock, but do we even have a firm release date for that yet? There's a great article about it in this months WiReD by the way.

    There are significant risks for GTA also. GTA games have been banned from shelves in the past. The climate is ripe for us to see that happen again.

    You are right about "mobile gaming" not being a replacement for big titles. It really just represents and expansion of the market. But the author merely said that Take 2 is looking at additional platforms. That could mean a lot of things. He didn't actually say what you claim he said.

    What WILL make "console" gaming obsolete are services like OnLIve. Your "console" is going to merge with your DVR or even your TV. When you buy games on Steam or get a subscription to OnLive, you aren't shelling out $60 per game. I believe that model IS going to go away

  • Report this Comment On December 31, 2012, at 10:42 AM, caballote77 wrote:

    Good points Bill.

    I agree with your OnLive and Steam comments.

    I just want to add that Bioshock and GTA have to come out eventually as the current console cycle is almost over.

    Even with GTA being banned from some stores in the past the last game still sold 14 million copies.

    Of course they're risks here. That is the reason the stock is beaten down so much.

    All I'm saying is let’s wait 6 months and revisit this article. All the metrics mentioned are backwards looking.

    Successful investing is all about the future.

  • Report this Comment On January 02, 2013, at 12:34 PM, ftfan35 wrote:

    To Bill, there has actually been a firm release date for Bioshock Infinite in late February for months. And as a great note that isn't being reported in any articles about Take 2 is that Amazon UK leaked the release date to people who preordered GTA 5 as March 26th.

    There may be some industry reprecussions with the recent shootings, but Take 2 shouldn't be slowed by it. The last instalment was released years ago, and with the new version being released in less than a few months they will avoid any legal hinderances because of the short window. Traditionally reactions from shottings like this take many months to just begin, and a more likely target for thier ire would be Activision's Call of Duty.

    And putting this into a metric for a "perfect" stock isn't exactly ideal, Take 2 is a perfect stock for those looking for explosive share growth, which you would not be getting on any stock that passes all the criteria set above. Anyone investing in Take 2 should know this, as a current stockholder and one who has been on and off for around a decade. You buy before GTA, sell right after.

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