Pretend it's early October 2017 and Apple suddenly announces that the expected iPhone X won't launch until spring 2018. Then, January arrives, and the tech titan announces that because it wants to make sure the quality of the finished product meets its standards, iPhone X won't launch until fall 2018. Just imagine the chaos among investors.
Top video game companies, including Take-Two Interactive (TTWO -2.35%), are mostly immune to the enormous uncertainty a major product delay from a company like Apple would cause for investors. Especially Rockstar Games, Take-Two's wholly owned studio that makes two of the biggest franchises in the game industry, Grand Theft Auto and Red Dead Redemption.
A week before Take-Two reported its fiscal third-quarter earnings results, the company announced, yet again, that the highly anticipated Red Dead Redemption 2 (the iPhone X of video games in 2018) will be delayed. The stock closed the day down about 1.5%. Perhaps investor optimism was buoyed by the fact that this time a specific release date was given -- Oct. 26, 2018 -- which may suggest that the date is finally set in stone.
Here's why the delay didn't effect Take-Two's stock price
The market's mostly muted response may be surprising to some, considering the Rockstar label is expected to make up 45% of Take-Two's full-year adjusted revenue, and may likely reach a higher percentage when Red Dead 2 releases. One reason for the muted reaction is that Rockstar Games has developed a reputation in the industry for producing consistent blockbuster hits. The Grand Theft Auto series has been one of the best-selling video game franchises of all time. The latest installment had sold more than 90 million units through the third quarter, which is unheard of for a console game that cost $60 on release.
Obviously, it requires a commitment to quality game development to produce the consistently high sales and high review scores that the Grand Theft Auto franchise has achieved over the years. Investors have come to understand this, and have given Take-Two a pass on game delays.
But Take-Two has something else that gives it a pass from investors. The market's muted response also reflects the changed revenue-generating strategy of video game companies. One reason Grand Theft Auto V (GTA V) has sold so well is the online multiplayer feature -- Grand Theft Auto Online -- that provides gamers an endless number of things to do with other players.
Four years after the game's initial release, Rockstar continues to pepper the player base with new game updates that keeps the game's content fresh. This is what drove record results for GTA Online during Take-Two's third quarter.
GTA Online has also been Take-Two's main driver of recurrent consumer spending, which accounts for players who spend money for virtual currency in order to unlock content faster than putting in the tens of hours of gameplay to unlock it for free.
Because recurrent consumer spending makes up nearly half of Take-Two's annual revenue, it's not as dependent on new game sales anymore. That said, Red Dead Redemption 2 is expected to provide the company quite an adrenaline shot after its release.
Management reaffirms guidance for fiscal 2019
In the announcement of the delay, management reaffirmed its guidance for fiscal 2019, ending in March 2019. Revenue is expected to reach $2.5 billion, exceeding the previous company record of $2.35 billion set in fiscal 2014, when GTA V launched. Cash from operating activities is expected to more than double over fiscal 2018 to about $700 million. Management has been very consistent with this guidance over the last year.
Red Dead Redemption 2 is the primary reason for such strong guidance, so investors certainly could get impatient with delays. On the company's third-quarter investor conference call, CEO Strauss Zelnick assured investors that the new October release date is firm.
One last reason why investors are willing to overlook Red Dead's delays is they know the game is definitely coming soon and it will be an important profit driver that could rival the impact GTA V has had on the bottom line, since management is planning an online feature for the game similar to GTA Online. This should keep margins moving higher, and profit growth strong in the years to come.