Since its release in September of this year, Grand Theft Auto 5 (GTA 5) , the latest iteration of Take-Two Interactive's (NASDAQ: TTWO ) flagship gaming franchise, has generated huge sales and has helped the company blow past Wall Street estimates for its earning and forward guidance in the latest quarter. Despite the smashing success and at least more than 20 million copies sold at this time, along with solid sales for Take-Two Interactive's other recent game releases such as NBA 2K14 and WWE2K14, the company's stock price and valuation have not moved much at all during this period:
The Prevailing Sentiment
It seems most people in Wall Street view Take-Two Interactive as a "one-trick pony" due to the over-reliance on one game franchise (GTA) for its earnings. As a result investors have consistently assigned lower valuations to it compared to two other video game industry heavyweights, Electronic Arts (NASDAQ: EA ) and Activision Blizzard (NASDAQ: ATVI ) .
Personally I agree with this sentiment to a degree as Take-Two Interactive has had a very erratic earnings performance since its last GTA game was released in 2008. Also the stock price plunged to below $8 per share in mid-2012 following the below-expectation sales number of Max Payne 3 and subsequent free cash flow concerns over the increasing development and marketing costs for company's future game titles. The stock recovered later in the year largely due to good critical/sales performance of the NBA2k13 and Borderland 2 releases, as well as anticipation over GTA 5. CEO Strauss Zelnick has also repeatedly mentioned achieving profitability for every subsequent fiscal year during company's conference call.
So what's different this time?
The previous GTA (Grand Theft Auto 4) did feature a multiplayer mode and a separate software named "Rockstar Social Club" for player interaction and communication. Unfortunately both offerings got lackluster reviews and were considered mediocre compared to popular multiplayer games such as Microsoft's Halo or Activision's Call of Duty series. However, the development experience provided a valuable lesson to Rockstar (creator of the GTA series and part of Take-Two Interactive) in designing the multiplayer mode for their next GTA game, GTA 5. This time around they wanted to do something not only ambitious in terms of features but also fundamentally different from previous attempt. The project became so big that the studio decided to give it a separate release schedule from the main game, as well as a new name: Grand Theft Auto Online.
GTA Online features an evolving, persistent game world, social media integration, mobile companion app, content editor, downloadable content (DLC), in game micro-transaction, and possible expansions for more story content and locales from previous GTA entries. In essence it will be a platform to which new content can be added rapidly and seamlessly, with the possibility to incorporate ideas from players themselves.
What Grand Theft Auto Online means for investors
In light of these developments and after experiencing the game myself, I think that Grand Theft Auto online can provide the following new opportunities to the benefit of Take-Two Interactive in the long run:
- More content can be added with substantially lower development costs, which in turn should increase the company's bottom line
- Persistent game world can provide better incentives for micro-transaction and DLC, as players can see their in-game characters grow instead of starting clean with every play session. This should increase the company's revenue and deliver more stable income with less of the need to rely on blockbuster video game releases
- As purchase of new GTA 5 is required for accessing GTA Online, it should be able discourage used game trading to a certain degree, which will create some additional revenue
- With enough content and user base it's possible to start an optional subscription service similar to Activision's World of Warcraft model, which should provide even more revenue for the company
- Enhances value as takeover target: it's more of a stretch at this point, but an established GTA Online can certainly increase GTA's franchise value and Take-Two Interactive's overall attractiveness for companies with interest in video game markets, such as Disney, Microsoft, or Sony. (NYSE: SNE )
Challenges from EA and Activision
Being the new kid in town in the online game field, there is no doubt GTA Online will face stiff competition from existing titles such as World of Warcraft from Activsion and Star Wars the Old Republic from EA. They are both highly respected and well developed by dedicated studios. However, I think there is still room for GTA Online's success as World of Warcraft has been in decline for a while, with subscribers down from peak 12 million to current 7.6 million, while Star War the Old Republic had so few people playing it that EA abandoned its original monthly subscription plan in favor of a free to play model with micro transaction in the hopes of recouping the huge development costs.
With the expectation that more than 30 million copies of GTA 5 will be sold at the end of this holiday period, there is a huge potential customer base for GTA Online. Despite initial hiccups, things are look promising for GTA Online as new content is being added (such as the free beach-themed DLC), as well as the ongoing bug fixes and performance optimization. Hopefully this will be a catalyst for Take-Two Interactive to warrant higher valuation by investors.