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Take-Two's CEO Thinks His Stock Is a Deep Value. Is He Right?

By John Ballard – Nov 7, 2021 at 1:22PM

Key Points

  • Take-Two repurchased $200 million worth of its stock last quarter.
  • Take-Two has selectively bought its shares over the last seven years ahead of growth in the business.
  • Management expects record financial performance in fiscal 2023.

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Management is buying back shares ahead of its strong pipeline of new releases.

Take-Two Interactive (TTWO -3.40%) delivered a strong quarter, with net bookings exceeding management's expectations and increasing 3% year over year to $985 million. The stock is rose 4.3% the day after the results.

One of the notable highlights of the earnings report was the disclosure that Take-Two had repurchased $200 million worth of its own stock in the quarter at an average share price of $158.67. This is big news, because, unlike most companies that do buybacks, Take-Two doesn't conduct a share repurchase program on an ongoing basis.

"This marks the first time in over two years that we repurchased our stock, underscoring the deep value that we observed in our share price," CEO Strauss Zelnick said during the earnings call. 

A chess board sitting on top of a pile of cash.

Image source: Getty Images.

For investors looking for a good reason to buy this top gaming stock, there's nothing like getting a thumbs-up from the head honcho who knows the business inside and out. Here's why this latest buyback could prove timely, once again.

Take-Two's buybacks foretell good returns

Zelnick has a great track record with share repurchases. The company bought back shares around the launch of Grand Theft Auto V in fiscal 2014 (ending in March). The stock is up 773% since then. 

It repurchased $26 million worth of shares in fiscal 2016, $154 million in fiscal 2018, and last repurchased $362 million in fiscal 2019. 

Of course, the stock has continued to appreciate over the last three and a half years, up 96% at the time of writing. If the stock was underperforming over this time, it would mean that management might have wasted cash buying an expensive stock instead of allocating it to better opportunities. So far, Zelnick has an exemplary record with his timing, so investors should take Take-Two's repurchases seriously.

The only criticism I would have about Take-Two's buybacks is that the average number of diluted shares outstanding has increased by 1.64% since fiscal 2014. Ideally, share repurchases should reduce shares outstanding over time, and therefore boost the per-share value of the business. Take-Two hasn't really accomplished that.

Still, Take-Two's share repurchases have been a reliable indicator of where the business is headed, and there are plenty of fires in the oven to deliver growth within the $233 billion video game industry. 

Take-Two expects record operating results in a few years

In the most recent quarter, Take-Two experienced consistent engagement across its top franchises, such as NBA 2K, Grand Theft Auto V, and Grand Theft Auto Online

Take-Two has a deep pipeline of new releases that should have an effect starting in fiscal 2023. While bookings and operating cash flow are expected to be down this fiscal year, management expects bookings to return to growth in fiscal 2023, along with record profits.

The stock fell to a low of $144 along with the broad sell-off in video game stocks this year, but Take-Two has rallied strongly over the last month, up 20% to $190 at the time of writing. 

On the surface, the stock looks expensive, trading at a price-to-earnings (P/E) ratio of 42 based on fiscal 2022 earnings estimates. However, looking ahead to fiscal 2023 estimates, the P/E drops to 29. 

Given the long-term growth that Take-Two should experience from its planned slate of 62 titles, I take the latest share repurchase as a green light to buy shares.

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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