Shares of Take-Two Interactive (TTWO 0.59%) have significantly outperformed its larger peers over the last year. While shares of Electronic Arts (EA 0.09%) and Activision Blizzard (ATVI +0.00%) are down by 30% and 40%, respectively, Take-Two stock is down by only 8%.
Take-Two has also outperformed EA and Activision over the last five-year period, with the Grand Theft Auto (GTA) maker's stock up 451%, compared to a return of 168% for EA and 106% for Activision.
Here are six signs that Take-Two could continue to outperform the return of its larger peers.
IMAGE SOURCE: GETTY IMAGES.
1. Take-Two is the better value
On the basis of valuation, Take-Two looks like the most undervalued stock among its U.S.-based peers. Here's how it matches up with EA and Activision Blizzard:
| Metric | Take-Two Interactive | Activision Blizzard | Electronic Arts |
|---|---|---|---|
| Forward P/E | 23.5 | 19.6 | 20.4 |
| Forward P/Sales | 4.4 | 5.1 | 5.4 |
| PEG ratio | 1.4 | 2.8 | 2.2 |
Data source: YCharts and Yahoo! Finance. P/E = price to earnings. PEG = price-to-earnings growth.
Take-Two stock has a higher forward P/E than its peers, but analysts expect the company to grow profits faster, which gives the stock a lower PEG ratio. It's also cheaper based on the P/S ratio.
2. Management is buying back stock
When a stock looks undervalued based on a range of valuation metrics and management is buying back stock at the same time, it's a good bet the stock is trading below the company's long-term value. Last year, Take-Two repurchased $362 million worth of shares.
This table shows the company's recent history of share repurchases going back to the year GTA V released in fiscal 2014 (which ended in March).
| Metric | Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | Fiscal 2015 | Fiscal 2014 |
|---|---|---|---|---|---|---|
| Share repurchases | $362 million | $155 million | $0 | $27 million | $0 | $277 million |
Data source: 10-K SEC filings.
It's worth emphasizing that Take-Two repurchases its shares very infrequently. Some companies perpetually buy back shares every year to "manage" earnings per share. But Take-Two CEO Strauss Zelnick is a value investor at heart. He's on record stating that he only likes to do buybacks when the stock represents "deep value."
The $277 million buyback five years ago is noteworthy, because the stock is up more than 1,000% since March 2014, which suggests Zelnick knows value when he sees it.
3. GTA V still selling copies
Red Dead Redemption 2 released last fall and is attracting a big player base right off the bat, with more than 24 million copies already sold. But GTA V continues to attract players, too, reaching more than 110 million units sold through the fiscal fourth quarter.
The ability for Take-Two to be able to grow Red Dead 2 while still generating a significant portion of its revenue from GTA V is a good sign that the company can begin to grow and diversify its revenue base. The company doesn't disclose sales for individual titles, but on the fiscal second-quarter conference call in November 2018, management said that GTA V had sold more than 100 million units. So, the game has sold around 10 million units in the last six months. Not bad for a five-year-old game.
4. NBA 2K continues to grow
To put in perspective how strong GTA V's sales have been in the last six months, consider that NBA 2K19 -- which launched in September 2018 -- has sold more than 9 million units and is on pace to be the best-selling title in the series.
Most importantly, management credited both GTA V and NBA 2K for driving the company's better-than-expected performance in recurrent consumer spending last quarter. Recurrent consumer spending (or in-game spending) for NBA 2K was up 45% year over year in fiscal 2019.
One of the reasons for NBA 2K's growth is China, where the real-life NBA is very popular. Take-Two has launched NBA 2K Online in the Middle Kingdom in partnership with Chinese tech giant Tencent, and the game currently has 45 million registered players.
The NBA 2K franchise has a lot of potential for further growth. Management sees a long-term growth opportunity for the game as professional basketball grows in popularity around the world.
5. Adding sponsors for esports
One of the key growth initiatives for the company is the NBA 2K League, where the best NBA 2K players in the world are signed to teams operated by the NBA. Recently, AT&T and the Champion apparel brand signed up as sponsors for the second season of the NBA 2K League -- a sign that esports is still trending up for Take-Two.
6. Investing in the future
Finally, the company has several things in the fire:
We have the strongest development pipeline in our history, including sequels from our biggest franchises along with exciting new [intellectual property]. In addition, we are actively investing in emerging opportunities, such as Private Division, mobile games, esports, and geographic expansion, that have the potential to be enormous drivers of growth.
We are extremely well positioned to generate significant growth and margin expansion over the long term.
-- CFO Lainie Goldstein
Take-Two's research and development expense increased by 67% to $230 million over the last two years, and management is calling for further increases in R&D this year, which is in preparation for more game releases.
The increase in R&D expense coupled with management's buyback activity is giving investors a signal that the company is set to grow significantly over the next 10 years or so, and that may not be reflected in the stock price.
