Take-Two Interactive (NASDAQ:TTWO) is riding a 300% gain over the last three years primarily from growth in digital in-game spending from its two bellwether games -- Grand Theft Auto V (GTA V) and NBA 2K. Investors have high hopes for the stock, with a major new release around the corner and expectations that the launch of its new esport based on the NBA 2K franchise will grow to be a significant profit contributor down the road.
Although I believe Take-Two should deliver gains for shareholders over the long term, there are a few risks investors should be aware of that could cause some downside to the stock in the short term. Let's take a look.
Is NBA 2K League drawing enough viewers?
Take-Two views esports as a potentially sizable stand-alone business for the company, but its early efforts haven't been runaway successes.
The company's video game equivalent of the real life NBA doesn't appear to be attracting a lot of viewers out of the gate. When its NBA 2K League launched in May, matches were drawing an average of less than 10,000 viewers on Twitch, a far cry from the 100,000 viewers Activision Blizzard's (NASDAQ:ATVI) Overwatch League gets on Twitch alone.
If Take-Two wants esports to scale up to a sizable stand-alone business, it's important to build a large audience to attract brands not related to gaming, such as consumer goods companies that may want to use esports to reach millennials.
Take-Two has sponsors among the expected gaming brands like Intel, Dell Technologies, and a handful of computer peripherals makers. It also receives sponsorship by sports-apparel maker New Era, which is expected for an event branded and operated by the NBA. The only non-endemic gaming brand to sponsor the league is insurance company State Farm. In contrast, Activision had already announced three non-endemic gaming brands as sponsors for Overwatch League after its opening week in January.
NBA 2K League has experienced an increase in viewership in the last month, so interest might pick up as the NBA works its marketing muscle to bring viewers in, but it's still way behind other esports.
Investors have built a lot of esports expectations into the price of Take-Two shares, and if the company stumbles in the space, the stock could take a bruising too.
Will Red Dead Redemption 2 stand out from the crowd?
Another reason investors are optimistic about the business is the upcoming release of Red Dead Redemption 2 -- probably the most anticipated game of 2018. This is expected to pick up the reins from GTA V and drive growth for the next few years at least. Management has guided for record revenue and free cash flow in fiscal 2019 based on high expectations for this new game.
One potential problem for Take-Two: the title will be dropped into a crowd of big multiplayer shooter releases. Activision's new Call of Duty game is getting a lot of hype for its new multiplayer features. Electronic Arts is also releasing a new Battlefield game. It's going to be a busy fall release schedule, for sure, with several games competing for players' time and money.
Take-Two is missing a hot trend
"Battle royale" shooter games are taking over the gaming industry. The games play like multiplayer shooters, with a twist -- a player is dropped onto a large in-game map with 100 other players to battle it out to the last one standing. In the month of June alone, Twitch viewers spent a combined 180 million hours watching others play battle royale games (e.g., Fortnite, PlayerUnknown's Battlegrounds, and Realm Royale).
As Fortnite, which is partly owned by Tencent Holdings (NASDAQOTH:TCEHY), shot to the top of Twitch's most watched games list during March -- its hours viewed nearly doubled to 116 million that month -- Take-Two's flagship game Grand Theft Auto V (which has sold 95 million copies) dipped from 14.5 million to 10.4 million hours viewed.
Take-Two executives believe battle royale games are helping to expand the audience for gaming, which, in turn, should lead to a growing audience for its biggest franchises. From a long-term perspective, I agree with this premise, but GTA V is a 4-year-old game that could lose some players in the short term to these other megapopular games, as Twitch viewership suggests.
If gamers continue to gravitate to these other hot games, it would be enough to take the wind out of Take-Two's sails.
John Ballard owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard, Take-Two Interactive, and Tencent Holdings. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.