Take-Two (NASDAQ: TTWO ) CEO Strauss Zelnick recently spoke at Credit Suisse's Technology Conference and gave his thoughts on future and potential investments for the company made possible by the success of Grand Theft Auto V.
With Grand Theft Auto V selling over 29 million units, Take-Two has capital that it's planning to use in three main areas.
First, the company will continue to invest in organic growth. Since Zelnick took charge of the company in 2007, Take-Two has seen revenue rise from $700 million to $1.2 billion at the end of its 2013 fiscal year as a result of organic growth. By releasing at least one new piece of intellectual property a year, the company's portfolio has grown to nine franchises that have sold between 1-5 million units at launch.
Second, Take-Two will return capital to investors through share repurchases. It recently used $270 million to buy back 16.2 million shares. The stock price didn't change much as a result of the action, but Zelnick isn't worried. "We didn't do the buyback in order to move the stock," said Zelnick, "I'm a big believer that don't look at what someone says, look at what they do and I just voted with $270 million of our capital that I feel this buyback fits the bill." By investing in itself, Take-Two has shown that it believes that its stock is a good investment. The company has a low PEG ratio of 0.43 compared to the ratios for Activision Blizzard (NASDAQ: ATVI ) and Electronic Arts (NASDAQ: EA ) of 2.52 and 1.15, respectively. This comparison implies that Take-Two stock is undervalued for its growth.
Lastly, Zelnick said that the company would look at accretive M&As -- acquisitions that will increase the company's earnings per share. In the conference Zelnick said, "We only do accretive transactions. And by accretive I don't mean high in the sky accretive, I mean like dollars and cents EPS accretive." This means that Take-Two probably won't acquire a massive, Blizzard-sized publisher, but will go for smaller companies that it considers undervalued. The company prefers to grow organically, but it is open to making acquisitions if they benefit its EPS and in turn its shareholders.
Take-Two has more than 10 projects in development for gen-4 -- PS4 and Xbox One -- that include current franchises, sequels, and new intellectual property. NBA 2K14 is already one of the highest rated gen-4 games available with a Metacritic score of 87 that crushes EA's disappointing NBA Live score of 47. When this is paired with the recent successes of Bioshock Infinite, Borderlands 2, WWE 2K14, and GTA V, Take-Two's franchises are strong enough to support the risk of releasing new intellectual property.
Releasing new intellectual property -- IP -- is riskier than adding sequels to existing franchises because there won't be a proven fan base for the new property. Activision can predict how many units a new Call of Duty game will sell more accurately than it can with new IP. Existing games provide security, but new games give studios an opportunity to create strong franchises for the future.
With the success of GTA V, Take-Two is in the strongest position it's been in since Strauss Zelnick took over in 2007. The company has the capital to continue building a portfolio of hit game titles and drive investor value. "We [Take-Two] expect to be profitable next year and for the foreseeable future," Zelnick said, "Those are not words I use lightly. And I have yet to be wrong when I've said things like that." I think Zelnick will follow through on his prediction.
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