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3 Reasons Take-Two Interactive Foresees More Growth After Crushing Earnings Estimates

By John Ballard - May 27, 2021 at 8:08AM

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This top video game producer has been attracting more players to its games, which portends good things to come.

Share prices of Take-Two Interactive (TTWO -1.30%) have bounced by 10% since May 18, when the company delivered fiscal fourth-quarter earnings that once again beat analysts' estimates by a wide margin. 

Take-Two's non-GAAP earnings per share have come in at least 30% higher than the analysts' consensus estimate over the last four quarters. The only negative point in the quarterly report was management's outlook, which forecasts that bookings will decline by 9% in fiscal 2022. But that didn't faze investors, who were apparently more interested in management's comments about the game development pipeline, and what that could mean for the company's medium-term growth.

Take-Two's fiscal 2021 Q4 ended March 31. Here's what management had to say on the earnings call and three reasons the company sees more growth ahead.

Two people sitting on a couch and holding video game controllers.

Image source: Getty Images.

1. Active player growth in key franchises

Nearly all of Take-Two's franchises outperformed expectations. Here are the notable standouts: 

  • Grand Theft Auto V (GTA V) reached a record number of active players and achieved the second-highest quarter of recurrent consumer spending on record. 
  • The stand-alone release of Red Dead Online, which serves as the multiplayer mode for Red Dead Redemption 2, exceeded management's expectations with active players "increasing significantly," said CEO Strauss Zelnick. 
  • Recurrent consumer spending in NBA 2K grew by 32% year over year, with more than 2.3 million users playing the game every day. 

The common theme was the growth in users playing these games. Zelnick believes "the pandemic initiated a transformational shift in entertainment consumption." He added, "We anticipate that the overall addressable market for our industry will be notably larger going forward than it was pre-pandemic."  

Take-Two is backing up this position with significant investments in new titles and development talent.

2. Expanding game development capabilities

"[W]e have over 60 titles that we plan to deliver over the next three years, and we are making significant investments in key areas such as marketing, personnel, and IT to bring our pipeline to market," CFO Lainie Goldstein said. 

These new titles range from free-to-play mobile games to add-on experiences that supplement existing franchises. But it doesn't appear that the list being referred to includes the sixth installment of the Grand Theft Auto franchise -- an eventual sales catalyst that the company continues to dangle in front of investors.

Take-Two's research and development spending has more than doubled over the last five years, with much of this increase going toward a larger development staff. 

TTWO Revenue (TTM) Chart

TTWO Revenue (TTM) data by YCharts

"We bolstered the depth of our creative teams by hiring more than 700 new developers, including through the acquisition of several talented studios which will help us expand our capabilities and grow our business," Zelnick said. 

3. There's still room for Take-Two's margins to grow

The growth in players across Take-Two's top franchises has come at an opportune time, with management preparing to launch these new experiences.

President Karl Slatoff said, "In addition to our title releases, we'll also continue to have significant long-term opportunity to increase engagement and recurrent consumer spending." 

Most importantly, recurrent consumer spending represents revenue from digitally purchased content; this higher-margin revenue stream should continue to support growing free cash flow over the long term. Recurrent consumer spending made up 63% of total net bookings in fiscal 2021. Management sees more room to increase that percentage over time, and thus improve margins. 

TTWO Free Cash Flow Chart

TTWO Free Cash Flow data by YCharts

Management has asserted that Take-Two can achieve new records of operating performance over the next few years. And the combination of new titles and a larger base of players to sell those titles into certainly lends credibility to that longer-term outlook. 

Take-Two plans to release 21 new titles in fiscal 2022. In the near term, investors should pay attention to how the upcoming new releases impact the performance of recurrent consumer spending. Maintaining high engagement in these games long after the initial release is a top strategic priority for the company, and will be a key factor in how well it can deliver returns to investors over time.

John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Take-Two Interactive. The Motley Fool recommends the following options: long January 2023 $115 calls on Take-Two Interactive. The Motley Fool has a disclosure policy.

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