The video game industry has provided monster winners for video game players and that has resulted in monster wins for shareholders over the last few decades. With almost $200 billion in consumer spending on video games every year (a figure that is steadily growing), game publishers like Electronic Arts and Activision Blizzard have crushed the S&P 500 index over the last 20 years.
Another video game publisher with a strong track record is Take-Two Interactive (TTWO +1.79%), whose stock price is up over 1,000% in the last 10 years alone.
But some recent game delays and a broad sell-off in video game stocks have resulted in Take-Two's stock price being down almost 30% this year. Does this provide investors a buying opportunity to get in on what has been a long-term compounder?
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Durable growth from existing games
Take-Two owns and publishes many different gaming franchises, but its most important is Grand Theft Auto (GTA). The company last released a premium GTA title in 2013, but it has steadily increased engagement with the game through regular updates and the GTA Online add-on. With the latest Xbox and PlayStation gaming consoles released last year, Take-Two has an updated version of GTA V for use on these new consoles, which further extends the life of this best-selling game in the U.S.
Originally, the game was going to be released in November but has recently been pushed back to early 2022. In conjunction with the release, GTA Online will be available as a stand-alone game; historically, you had to buy GTA V to access it.
Take-Two's other important franchises are Red Dead Redemption (RDR) and NBA 2K. NBA 2K is very similar to FIFA or Madden NFL, with an annual release, and a popular online and eSports community. RDR is similar to GTA's game style but has only ever released two games in its history. The last one, RDR 2, launched in 2018, has sold 38 million copies since then, making it the second best-selling video game title in the U.S. (based on dollar sales) over the last three years, according to an NPD Group report. Take-Two has replicated the GTA strategy with RDR, building a stand-alone RDR Online game that will hopefully expand its popularity.
One way investors can see the success of this expansion strategy is by noting the growth in Take-Two's recurring customer spending. This segment has grown net bookings at a 37% compound annual growth rate (CAGR) from fiscal year 2017 through fiscal year 2021, greatly outpacing the company's overall net bookings at a 17% CAGR.
Strong product pipeline
One concern investors have with Take-Two is what hit games will be coming out over the next few years. Management hasn't set a date for GTA VI, and a new RDR game won't be coming for a while because of the relatively recent RDR 2 launch. Yes, recurring customer spending should continue with the company's online strategy and steady NBA 2K sales, but to meaningfully grow this business, Take-Two will likely need another hit game within the next three to five years.
This will almost assuredly be GTA VI, which the company has had time to work on for almost a decade now, but Take-Two has a huge pipeline of other games that could help it grow as well. According to management's latest investor presentation, Take-Two has 62 new releases coming in the next three years, including over 20 games associated with its three biggest franchises. To help get these games pumped out, the company has accelerated the growth of its employee base. Take-Two now has 5,000 employees working on game development, up from only 2,000 back in 2015. While none of these games are guaranteed to succeed, with Take-Two's track record of execution over the last decade, it is likely that the company's revenue and profits will be much higher three to five years from now.
Large cash pile and a reasonable valuation
The stock sell-off has helped reduce Take-Two's valuation over the past few months. With a market cap of $17 billion, Take-Two stock trades at a price-to-operating-cash-flow (P/OCF) of 42 based on management's fiscal year 2022 guidance (the year we are currently in). This may seem expensive, but investors should remember that video game companies have somewhat lumpy financials because of irregular game releases.
Last year, Take-Two generated $912 million in operating cash flow, and the year before, it generated $686 million. The company's extension strategy with the new consoles and the huge three-year pipeline, and the eventual release of GTA VI will likely give a significant boost to Take-Two's annual cash flow a few years from now.
Lastly, investors should love that Take-Two has $2.5 billion in cash on its balance sheet and minimal debt. This gives management flexibility with investing in new titles or returning that cash to shareholders through repurchases or dividends.
Overall, Take-Two Interactive has a strong track record of game development, has increased its product pipeline, and trades at a reasonable valuation -- if you have a multiyear time horizon. This makes the company one of the most attractive, if not the most attractive video game stock for investors to buy at the moment.
