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Now’s the Time to Buy Take-Two Interactive

By John Ballard - Updated Mar 30, 2020 at 9:19AM

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The video game company is planning major releases across its biggest franchises over the next five years.

Take-Two Interactive (TTWO 3.64%) has done a great job growing its Grand Theft Auto franchise over the last 20-plus years. From fiscal 2000 through 2010, total revenue increased 218% to $1.16 billion. And the company repeated that performance over the last decade. Thanks to monster sales of Grand Theft Auto V (released in 2013), the launch of new franchises like Red Dead Redemption (2010), and growth in spending for digitally-delivered content, revenue has more than doubled again to reach $2.67 billion as of fiscal 2019.

In that same two-decade span, the stock is up 1,360%. Looking ahead, there are three reasons why investors should expect continued growth over the next decade, which makes the recent market sell-off an ideal time to add shares to your portfolio.

Two young couples playing video games.

Image source: Getty Images.

Plenty of new games under development

During the fiscal third-quarter earnings call in February, Take-Two President Karl Slatoff said, "Take-Two's development pipeline over the next five years is the largest and most diverse in our company's history." 

Management has emphasized that fact in recent quarters, but they don't name specific titles its internal studios are working on. However, just looking at the company's history, there are plenty of clues.

What is undoubtedly under development is Grand Theft Auto VI. With new consoles launching this fall, Take-Two's Rockstar Games -- the studio that develops the Grand Theft Auto and Red Dead Redemption franchises -- will likely be planning some new launches in the next few years to capitalize on the growth of the new hardware systems. Given that it's been more than six years since the last release, it seems reasonable to expect the new Grand Theft Auto title to be announced within the next few years. 

For 2020, Take-Two has confirmed Kerbal Space Program 2 and a new sci-fi shooter called Disintegration from its Private Division label. Private Division made a splash last year with the critically-acclaimed The Outer Worlds, which exceeded management's expectations by selling more than two million copies. 

Slatoff said, "Our new label is taking a strategic approach to working with some of the industry's best creative talent and is quickly amassing an impressive pipeline for the future." Not only is the pipeline the "largest and most diverse" in the company's history, but Slatoff also said that these upcoming releases will come from Take-Two's "biggest franchises." CEO Strauss Zelnick clarified that this includes titles across all the company's studios -- Rockstar, Private Division, the mobile game studio Social Point, and 2K.

Investors should probably expect a new BioShock title at some point, and perhaps a new version of L.A. Noire. The detective-based game released in 2011 from Rockstar Games sold about five million copies, according to VGChartz. A new L.A. Noire sequel that takes advantage of the enhanced graphics power in the upcoming console releases should add to the franchise's lifetime sales. Take-Two already released a remastered version of the game for the Playstation 4, Xbox One, and Nintendo Switch in 2017.

The pipeline also includes several sports titles in partnership with the NFL. Additionally, Take-Two's mobile game studio, Social Point, currently has five active mobile games on the market with 10 new games under development. 

It's clear that Take-Two is not short of ideas, but here's the real reason why investors should be optimistic.

Record of growing existing franchises

The Sony PlayStation 5 and Microsoft Xbox Series X will feature significantly improved graphics capabilities and faster processing speed. Each new advancement in technology has a way of making the best games in the industry stand out and sell more copies. I believe this played a key factor in the growth of Grand Theft Auto V, which has sold a staggering 120 million copies since 2013. 

Red Dead Redemption 2 has sold 29 million copies since its release in fall 2018. That's already more than double what the original Red Dead Redemption sold on the previous console generation nearly a decade ago. 

The trend of each new release selling more copies than the previous installment is a great sign for investors and bodes well for the new games in the pipeline. It also demonstrates that Rockstar Games has the ability to make its games better over time, which cannot be discounted in explaining the enormous success of the Grand Theft Auto and Red Dead Redemption sequels.

New business models

During the recent call, CEO Strauss Zelnick stressed that Take-Two's growth strategy extends well beyond making new games. "We're actively investing in emerging markets, platforms, and business models that have significant potential to enhance our growth," he said. Of course, one of these emerging business models is esports with the NBA 2K League, a professional gaming league based on the best-selling basketball series.

Another opportunity is streaming, where gamers will be able to access a large library of games for a monthly subscription fee. Several tech companies, including rival game maker Electronic Arts, are in various stages of developing their own game streaming services. Alphabet's Google Stadia is already available, and Microsoft should be launching Project xCloud soon. 

Slatoff said, "Streaming may become a compelling distribution platform for our industry that could expand our market," and most importantly, he added, "increase margins." 

Take-Two is a no-brainer

Take-Two is a promising growth stock to buy right now. It has outperformed the broad market year to date, proving its worth to people who are self-isolating and spending more time consuming digital entertainment.

Most importantly, Take-Two has a strong balance sheet with nearly $2 billion in cash and short-term investments and no debt. The stock is also cheaper than its peers on a price-to-sales basis.

TTWO PS Ratio Chart

Data by YCharts.

The company has everything an investor could want in a great gaming stock, including a long track record of best-selling titles and a deep development pipeline. Take-Two is home to some of the most valuable franchises in the industry, and the stock currently offers an attractive value compared to its larger peers. That looks like a buy to me.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. John Ballard owns shares of Activision Blizzard, Electronic Arts, Microsoft, Nintendo, and Take-Two Interactive. The Motley Fool owns shares of and recommends Activision Blizzard, Alphabet (A shares), Alphabet (C shares), Microsoft, and Take-Two Interactive. The Motley Fool recommends Electronic Arts and Nintendo and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. 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.
$127.62 (3.64%) $4.48
Electronic Arts Inc. Stock Quote
Electronic Arts Inc.
$131.55 (0.14%) $0.18
Microsoft Corporation Stock Quote
Microsoft Corporation
$293.65 (0.60%) $1.74
Alphabet Inc. Stock Quote
Alphabet Inc.
$122.14 (0.37%) $0.46
Sony Corporation Stock Quote
Sony Corporation
$87.05 (0.29%) $0.25
Nintendo Co., Ltd. Stock Quote
Nintendo Co., Ltd.
$54.17 (0.43%) $0.23
Alphabet Inc. Stock Quote
Alphabet Inc.
$122.88 (0.19%) $0.23
Activision Blizzard, Inc. Stock Quote
Activision Blizzard, Inc.
$80.63 (-0.20%) $0.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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