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The Game Is Just Getting Started for Take-Two Interactive

By Justin Cardwell - Oct 5, 2019 at 1:00PM

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Growth continues as the Borderlands franchise breaches $1 billion in sales.

The video game market is projected to hit $300 billion by 2025, according to a study by GlobalData, more than double the 2018 value of $130 billion. With a compound annual growth rate of 13%, investors need to take the video game industry seriously. Take-Two Interactive (TTWO 2.05%) is a giant in video game development, publishing, and distribution. An interest in mobile gaming in addition to highly anticipated unreleased titles has investors eyeing further growth in Take-Two's future.

Heavy hitters

The recent release of Borderlands 3 has set a record for Take-Two's video game developer 2K, selling 5 million copies in five days. Selling 50% better than Borderlands 2, the new title is showing growth in popularity and revenue, hitting $1 billion in revenue for the franchise.

The largest game franchise in Take-Two's portfolio is Grand Theft Auto with 290 million units sold to date, 110 million of those units sold from the 2013 release of Grand Theft Auto 5. Gamers are anxiously awaiting the next release, which should be in 2022 or 2023, as there is an average of four years between the releases from developer Rockstar Entertainment. In the meantime, the release of Ancestors: The Humankind Odyssey in August, Borderlands 3 in September, and The Outer Worlds in October are expected to continue delivering positive results.  

Stepping into mobile

Take-Two's largest weakness is within the fastest-growing segment in the video game market: mobile gaming. With a small portfolio of mobile games, Take-Two has acknowledged the weakness in mobile and in 2017, it acquired Social Point for $250 million to fill the hole. Social Point develops games primarily for Facebook (META 1.70%) that collect microtransactions to drive revenue. Titles include Dragon Land, World Chef, and Monster Legends. As one of six developers to have two games in the top 100 highest-grossing mobile games at one time, Social Point has a proven track record of success and will get the ball rolling into mobile gaming.

It's all in the numbers

In the recent first quarter of fiscal 2020, net revenue grew 39% year over year. Revenues were generated mostly from recurrent customer spending which includes in-game purchases, add-on content, and virtual currency. With a growth rate of 31% year over year, recurrent spending is proving to be the bulk of revenues at 58% in the recent quarter. Growth in net bookings grew 46% year over year, with net bookings from recurrent customer spending growing 55%. 

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Looking forward, Take-Two Interactive raised the 2020 financial outlook with an expected revenue between $2.83 and $2.93 billion, an increase from 2019 revenue of $2.67 billion. Earnings per share are expected to follow suit with an expected $3.71 to $3.96 per share in 2020, rising 26% to 34% from 2019.

Game on

Take-Two Interactive is a strong company financially and strategically within the video game industry. With positive momentum from releases in addition to strong financials, Take-Two is expanding across the industry, taking on competitors such as Electronic Arts (EA 1.30%) and Activision (ATVI 0.35%).

Investing heavily in employees, Take-Two has gone from an employee base of 1,100 in 2007 to 3,400 in 2018, generating forward momentum to release new versions of franchise titles and entirely new games. The balance sheet is strong with cash and a short-term investment balance of $1.542 billion at the end of the quarter. With a free cash flow per share growth of 144% over the trailing 12 months, Take-Two will continue investing in growth -- increasing its mobile footprint and impressing investors.

The gaming segment is growing at double-digit rates. Investors deciding to purchase and hold Take-Two Interactive for the long-term will be glad they did. 

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Justin Cardwell has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard, Facebook, and Take-Two Interactive. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Take-Two Interactive Software, Inc. Stock Quote
Take-Two Interactive Software, Inc.
$123.14 (2.05%) $2.47
Electronic Arts Inc. Stock Quote
Electronic Arts Inc.
$131.37 (1.30%) $1.69
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$180.50 (1.70%) $3.01
Activision Blizzard, Inc. Stock Quote
Activision Blizzard, Inc.
$80.79 (0.35%) $0.28

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