Some big news dropped last week when Rockstar Games, Take-Two Interactive's (TTWO +0.96%) most important video game studio, put out a blog post discussing the future of its largest franchise: Grand Theft Auto (GTA). The post outlined recent updates for GTA Online, when GTA is coming to the next Xbox and Playstation consoles, and an update on the next game in the franchise.
GTA is one of the top-selling video game franchises in the world, with GTA V having sold 160 million copies since its launch in 2013. Here's what Rockstar's blog post said and why it could have big implications for Take-Two's stock over the next few years.
Image source: Getty Images.
The announcement
Rockstar's post starts with some updates about GTA Online, the immersive online world where players can interact with other GTA players. Over recent months, Rockstar has released new stories within the GTA Online universe, like a recent story called The Contract, where players help musical artist Dr. Dre recover lost musical tracks. A robust GTA Online is important because that is where a lot of Take-Two's revenue growth has come over the last few years. Since fiscal year 2017, recurring customer spending (which includes GTA Online) has grown at a 37% compound annual growth rate (CAGR). In its latest quarter, this segment accounted for 57% of overall net bookings. Net bookings is a sales equivalent for video game companies, as they are forced to defer some revenue under generally accepted accounting principles (GAAP).
To keep the momentum going with GTA Online, Rockstar is making it available for separate download once GTA V hits the new Sony Playstation and Microsoft Xbox consoles on March 15. Previously, only people who bought copies of GTA V could access GTA Online. Now, with an easier way to access the online world, more users will hopefully join and start spending money on it.
Steady growth in recurring spending is important for Rockstar/Take-Two, but the most important update in the blog post came in the last paragraph:
With every new project we embark on, our goal is always to significantly move beyond what we have previously delivered -- and we are pleased to confirm that active development for the next entry in the Grand Theft Auto series is well underway.
While not explicitly saying it, this means that GTA VI is getting closer to a release date. Take-Two's stock shot up approximately 5% after the announcement as investors were likely excited about what it means for Take-Two's financial prospects over the next few years.
Reading the tea leaves
We didn't get a specific release date for GTA VI in the update, but given Take-Two's product roadmap and historical release schedule, we can tease out when the blockbuster game will likely come out. For one, with GTA V launching on the new consoles in March, GTA VI is likely not coming in 2022. Management wouldn't want to starve the updated version of demand after spending so many resources revamping the game for the new consoles. Second, big-time games are almost always released in the fall, which is prime time for consumer spending with Black Friday and the holiday season. GTA V went live on Sept. 17, 2013, for example. While not guaranteed to happen, GTA VI will probably launch in the fall of 2023 or 2024, barring any major setbacks.
Why is the GTA VI launch so important? Two reasons: unit sales and the continued growth of GTA Online. As I mentioned above, GTA V has sold 160 million copies since its launch in 2013 and did 32.5 million units in its launch year, making it the most popular single game of the past decade. Assuming an average selling price of $40 over its life (it is now discounted off of the traditional $60-$70 unit price for high-end console games), that is $6.4 billion in sales for Take-Two just on game sales since 2013. With video games more popular around the world now compared to 2013, it is possible that GTA VI will outsell GTA V in its launch year, which would boost Take-Two's sales significantly.
Even more important is what GTA VI can do for GTA Online. When the new game launches in 2023 or 2024, it will bring on new players and recruit any players that stopped engaging with the franchise sometime over the past 10 years. If this happens, Take-Two's recurring consumer spending should continue growing at a double-digit clip over the next five years. Remember, this segment is now the majority of Take-Two's net bookings.
What does it mean for the stock?
Take-Two has many important franchises outside of GTA, including Red Dead Redemption and NBA 2K. However, the biggest drivers of the stock returns over the next five years will be the success of GTA VI and GTA Online.
Take-Two Interactive currently has a market cap of $18.8 billion. In fiscal year 2021, which ended last March, the company generated $920 million in operating cash flow (the best profitability metric for video game companies). This fiscal year, that number is expected to drop to around $400 million. However, that is mainly because the company is in a heavy development stage and didn't have any large game launches outside of NBA 2K 2022 this fiscal year. If GTA VI launches in the near future and is as successful as GTA V, Take-Two's cash flow could get well above $1 billion a year, which would be great news for long-term shareholders.
Lastly, you should know that Take-Two recently announced the major acquisition of Zynga, a mobile games developer, for $12.7 billion. Before buying shares of Take-Two stock, it is important to read up on the deal, as it brings on a games business with an entirely different strategy than Rockstar and Take-Two's console/PC business.
