Take-Two Interactive (NASDAQ:TTWO) has seen its revenue more than double over the last five years, following the launch of Grand Theft Auto V in fiscal 2014. Strong sales of new games coupled with growing revenue from digitally delivered content has caused Take-Two to improve from a money loser to a cash-generating machine. For fiscal 2017, Take-Two generated $331 million in cash flow, up from $261 million the year before.

Investors love the progress on the bottom line, as the stock is up 90% over the last year, so it's a good time to pause and evaluate whether shares have gone too far, or if they're still a good investment. Let's examine Take-Two's valuation coupled with what lies in store for the future to answer that question.

Over-the-shoulder view of a man holding a controller while playing a video game on a flat screen TV in a living room.

Image source: Getty Images.

Take-Two's current valuation and growth expectations

One way we can get a sense for whether Take-Two is overvalued or still a buy is to compare its valuation with the S&P 500 Index, which tracks the performance of 500 large-cap U.S. based companies. The index currently trades for a forward P/E ratio of 18 times earnings estimates. Take-Two, on the other hand, trades for 47 times earnings estimates for fiscal 2018 ending in March.

Before you declare the video game maker too expensive and move on, we need to consider growth expectations. A higher P/E ratio is justified if Take-Two is growing much faster than the average company in the S&P 500 Index. While analysts currently estimate the average company in the index to grow earnings 10% per year over the next five years, Take-Two is expected to grow earnings about 20% per year.

Analyst growth estimates are consistent with Take-Two's previous five year growth rate across revenue, cash flow, and earnings. From fiscal 2012 through fiscal 2017, Take-Two's net revenue grew 16.6% annually, reaching $1.78 billion. Cash flow improved from negative $85 million to $331 million over the same period, while earnings mirrored the same improvement, going from a loss of $0.71 per share five years ago to a gain of $2.04 per share in fiscal 2017.

Take-Two is getting ready to have a monster year in fiscal 2019

We also need to consider that fiscal 2018 is going to be void of a big hit release because of the delay of the highly anticipated Red Dead Redemption 2. The popular western action game was originally scheduled for a fall 2017 release, but was pushed back to spring 2018, which will fall in Take-Two's fiscal year 2019. Analysts currently expect Take Two to report $3.83 per share for fiscal 2019 earnings, largely based on high sales expectations of Red Dead 2. This brings Take-Two's forward PE down to less than 20 times earnings. As you can see, we're paying a big premium for Take-Two's stock today, but high expected growth will quickly bring that P/E down to more reasonable levels.

Earnings of $3.83 per share equates to about $443 million based on a fully diluted share count of 115.9 million. This is in line with management's early guidance for fiscal 2019, which calls for revenue of $2.5 billion and cash from operations to be about $700 million. The only reason management would issue guidance this far out is they know how big Red Dead 2 will be and they wanted to provide a lift to investor confidence who might have been disappointed with the news of the delay.

Take-Two is still a buy

Take-Two's stock has had an epic run, but that shouldn't leave investors skittish about buying the stock. Besides future blockbuster game releases, the game maker has long term growth opportunities in esports and mobile gaming, as well as the potential for further margin expansion as the industry continues shifting to a digital distribution strategy of games and add-on content. After examining the stock's current valuation in light of business performance, Take-Two still looks like a good opportunity for Foolish investors with a long-term mindset. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.