On Jan. 10, Take-Two Interactive (TTWO 0.56%) announced it is acquiring Zynga (ZNGA +0.00%) in a deal valuing Zynga at $12.7 billion. This could be really good news for Take-Two shareholders. In this video clip from Motley Fool Backstage Pass recorded on Jan. 10, Fool analyst Clay Bruning talks to contributors Jon Quast and Jose Najarro about how Zynga could make Take-Two a much more profitable company and a good total shareholder return investment.
Jon Quast: Take-Two Interactive, coming in at Number five on our collective rankings here. Clay went ahead and volunteered to talk Take-Two and again, we ranked these under the assumption that this deal hadn't happened yet just based on the timing. Clay, what do you think about Take-Two?
Clay Bruning: Yeah, I like Take-Two's business stand-alone. Most of that is because not only are they similar to that of Activision Blizzard and EA, but they've shown a pretty prudent way of managing the business and growing revenues while also improving margins over time. I'm even more bullish on the company with the Zynga dealing, assuming it closes for a couple of reasons and I'll show a couple of charts. But if you think about their portfolio of games, I think it's second to none outside of maybe Activision Blizzard with some of the brands that Jose mentioned. When you think about the 2K intellectual property and Rock Stars division with Grand Theft Auto, Red Dead Redemption, etc.
I alluded to it earlier when I was talking about EA, I didn't think Glu Mobile was necessary as the premier mobile asset. I think Zynga is that. You now have one of the best capital managers and Take-Two's management team with a company and Zynga that is growing faster at higher margins, at least on the gross margin side of things. You have this incredible company that's generating cash flows and now growing faster than some of their peers as well.
I'll just share my screen here. Just to put this in perspective, here, I outlined over the last three years Zynga's and Take-Two's gross profit margins so you can see. Not as much Zynga, it has been give or take flat around that 60% to 63% margin over the last few years. But Take-Two's done an exceptional job growing from low 40% to high 50%. When you add in Zynga's higher-margin business, I wouldn't be surprised if this grew into the low 60% over time.
Then I have the EBIT margin. Essentially, similar trajectory that Take-Two has had as their gross-profit margin is, they've increased it from, let's say, 11% in 2019 to low 20% here, over the last couple of years. Again, you've taken the scale that Take-Two has and you integrate a company like Zynga that has incredible synergies, there's just a lot of optionality. We talked about it with Nintendo, but if you think about the portfolio of IP that Take-Two has, and you integrate it with one of the leading mobile developers. Your mind can go, and my mind has certainly been going a lot of different ways.
Then on top of this, it's a total return play. I believe that they pay out a dividend, they are paying out a buyback. Now, they just have this awesome synergistic deal. Take-Two, especially with the Zynga deal, assuming it goes through is a really exciting company and why I personally ranked it significantly higher than their main competitors in EA and Activision.
Jose Najarro: Yeah. One of my favorite things about this acquisition, just like Clay mentioned, the future potential of the mobile growth. I think in the overall shareholder letter that they explained a little bit, Take-Two Interactive is already planning on using Zynga's mobile team to expand their strong franchises into the mobile market, which they believe will grow a nice amount of bookings for them in the upcoming years.
Bruning: Yeah. One thing on Zynga. Over the past three years, they've grown revenues on average annually, 45% year over year. That compares to, I believe to Take-Two being in the high, mid-single-digits. If they execute on this, realize the mobile synergy specifically, I think Take-Two could be growing in the low teens, potentially the next couple of years. Just making a lot, a lot of money to whether it's distribute to shareholders or reinvest in mobile development or new game development. It's just a really exciting deal having done some work on Zynga in the past. They combined an intellectual property and for that matter, developer talent is going to be really interesting to see development over the next couple of years assuming this deal closes.
Quast: It's really interesting and my internet was messing up there a little bit, so I don't know if you already said it. But one of the interesting things reading the press release here on the acquisition was Take-Two, their mobile gaming revenue right now is like 10%, 12%, it's low part of the total revenue. But after Zynga acquisition, they are saying that this coming year, maybe half of their revenue will be from mobile.
You really start to think about it. Console games, intellectual property, mobile games, mobile game intellectual property, and Zynga acquired Chartboost, an advertising-technology company where they are getting a lot of data on mobile apps. All of a sudden, this the total package in many ways with Take-Two. We pointed out before on the show, mobile gaming; the only segment of the gaming market that's actually putting up good growth numbers. Now, Take-Two has that leveraging that intellectual property with the intellectual data. I mean, this could get very interesting.
