Some businesses are so good, the best thing an investor can do is buy some shares and let the magic of time do all the work. Take-Two Interactive (TTWO -0.03%), Trex (TREX -0.57%), and Align Technology (ALGN -0.78%) are in that category. Even though their valuations may be high relative to their history, they have products that are in demand because of trends that have only accelerated amid the pandemic. An investor could buy stock in these great companies and not think about selling for a long, long time.
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Take-Two Interactive
The pandemic has made us all gamers. Well, almost all of us. A recent NPD Group survey found that 4 out of every 5 U.S. consumers had played a video game in the past six months and that time spent playing was up 26%. Take-Two Interactive is capturing more than its share of that activity with the latest installments of popular franchises NBA 2K and Grand Theft Auto (GTA), the No. 2 and No. 8 best-selling console video games, respectively, in November. That's a remarkable feat considering the first GTA was released in 1997 and the NBA 2K series debuted in 1999.
Those games, and others like them, have powered Take-Two to a record $3.3 billion in revenue and $4.13 in earnings per share over the past 12 months. For the six months ended Sept. 30, revenue, operating income, and earnings per share were up 20%, 56%, and 57%, respectively. Higher-margin digital sales also grew to 86% of revenue during the period, compared to 75% in 2019.
| Metric | Six Months to Sept. 30 | YOY Growth |
|---|---|---|
| Revenue | $1.67 billion | 20% |
| Operating income | $198 million | 56% |
| Earnings per share | $1.65 | 57% |
Source: Take-Two Interactive. YOY = year over year.
The stock is up 65% year to date, and it isn't cheap at 49 times trailing-12-month earnings. But if the new gaming habits persist, the stock will look like a bargain in the years ahead as video games take up a higher percentage of our entertainment time and budget.
Trex
In November, single-family-home starts reached their highest level since April 2007. The number has increased for seven consecutive months thanks to a desire for more space and record low mortgage rates. With the pandemic persisting, outdoor living space has been at a premium, and Trex -- whose decking and railing products are made from recycled materials -- is in demand.
After the company grew revenue 8.9% in 2019, the first three quarters of 2020 have produced sales growth of 11.6%, 9.4%, and 19%, respectively. Management expects 30% growth in the fourth quarter, ending Dec. 31, and says feedback from contractors shows the growth continuing unabated.
Although the stock is up 84% year to date, the company sees an opportunity to grow far into the future, with 80% of the decking market still held by wood. Trailing-12-month revenue is $817 million, and every additional percentage point of market share Trex can capture is worth another $50 million in sales. To this end, management has invested in additional capacity, ramping up new production lines able to produce 70% more decking to meet the demand. That's great news for shareholders because the company has proved it can scale up. Operating margin has increased every year since 2012 (when it was 4%) and was 27% for the past 12 months.
The company's price-to-earnings ratio of 57 is about 80% higher than its five-year average, but valuation is likely a short-term concern. With new capacity coming on line and more of each sale dropping to the bottom line, Trex should quickly grow into that valuation. Great businesses often surprise us by how quickly that can happen, and potential shareholders are likely to miss out on gains while they wait for proof.
Align Technology
After producing 22.5% compound annual growth from 2010 to 2019, Align saw sales collapse in the early months of the pandemic. Due to shutdowns in China, and then Europe and the U.S., first-quarter revenue was only up 0.4% over 2019, and second-quarter revenue fell 41.4%. At one point in March, the stock was down more than 50% for the year.
In response, Align rolled out virtual training and digital aids to help doctors and patients who are already customers stay on track, as well as sway those using metal braces to switch to its Invisalign clear teeth straighteners. Year-over-year sales growth in the third quarter recovered, coming in at 20.9%.
The stock is up 278% off its March lows and currently trades at a price-to-sales multiple of more than 18, double where it ended the last two years. That seems steep, but sales growth is remarkably consistent, and it could go on for decades. Management thinks the immediately addressable market is 15 million customers, with the potential for 500 million long term. For context, Align only recently served its 9 millionth patient.
The efforts to expand the market are already bearing fruit. The company's teen- and mom-focused campaign using social media influencers produced a 118% year-over-year increase in sales leads and 25.6% more teenagers using Invisalign in the third quarter.
Align stock may be expensive, but with a management team that has consistently found ways to grow the company, and a globe full of people with crooked teeth, it is likely to earn its valuation for investors willing to buy and hold shares for at least three to five years.
