Video game company Take-Two Interactive (TTWO 0.01%) has been in the news lately because of its proposed acquisition of mobile-game developer Zynga (ZNGA +0.00%) at a valuation of $12.7 billion. And as a Zynga shareholder, I'm excited by what the future holds for the combined companies.
That said, the deal isn't final and there's a small chance that it won't happen. What happens if Take-Two Interactive doesn't acquire Zynga? Well, the company just gave shareholders financial projections through 2025 as a stand-alone business. And within those projections, there's a $1.2 billion reason I believe Take-Two stock can be a market-beating investment.
Image source: Getty Images.
The $1.2 billion surprise
Companies file S-4 documents with the Securities and Exchange Commission (SEC) when they issue stock to buy other companies, like what Take-Two is doing with Zynga. To be clear, Take-Two is paying some cash but using stock as well.
Accordingly, Take-Two already filed its S-4. And buried in the filing were financial projections through 2025 for Take-Two as a stand-alone business -- it's rare to get guidance this far out. The filing shows that management believes it will report almost $3.4 billion in net bookings in fiscal 2022. That period ended on March 31, but the company hasn't reported those official results yet. However, the bookings guidance for fiscal 2022 in the S-4 is in line with what management already has said in quarterly reports.
Take-Two management expects net bookings of over $5.5 billion by the end of fiscal 2025. That's an astounding 64% increase in bookings in just three years' time and signals extreme confidence in its pipeline of new games.
NASDAQ: TTWO
Key Data Points
The best part, in my opinion, is that Take-Two expects nearly $1.2 billion in adjusted net income in fiscal 2025, up from $532 million in fiscal 2022.
History shows a strong correlation between earnings growth and stock performance. Therefore, if Take-Two Interactive can more than double its earnings over the next three years as it projects, I expect the stock price to generally track higher as well.
Better together?
Keep in mind that we're just talking about Take-Two Interactive on its own. But Zynga brings a big business to the table as well. While Take-Two is technically acquiring Zynga, this is closer to a merger of equals than you might think. For calendar 2021, Zynga had $2.8 billion in net bookings. Over this exact period of time, Take-Two had $3.3 billion in net bookings -- just 18% more than Zynga.
Zynga is the creator of Farmville and other popular mobile games, and it's done a good job of growing its user base and revenue over the years. However, one could be critical of Zynga's profitability. While it does generate positive cash from operations, it has consistently registered a net loss since going public in 2011, and it's failed to grow its earnings per share (EPS).
ZNGA cash from operations (TTM). Data by YCharts. TTM = trailing 12 months.
Zynga stock went public at $10 per share, and it now trades slightly below that, over a decade later. Again, stock performance tends to correspond with earnings growth over long periods of time. Zynga hasn't grown its EPS; therefore, it has unsurprisingly been a market-losing investment.
Perhaps that can change under Take-Two's management. The two companies do expect to realize $100 million in annual cost savings within the first two years of the merger, so that will help. But more generally speaking, Take-Two management has tripled its EPS over the past five years, whereas revenue hasn't even doubled. In short, profitability has been a priority for this company for a long time, and I don't expect that to change with its acquisition of Zynga.
TTWO diluted EPS (TTM). Data by YCharts.
Buy this market beater
As previously mentioned, Take-Two will issue shares in conjunction with acquiring Zynga, so there will be a slightly dilutive effect. Additionally, the company expects to have negative free cash flow in its coming fiscal year. Therefore, don't expect Take-Two stock to necessarily rocket higher in the near term. These things can tether it to the ground for now.
Moreover, there's a difference between net earnings according to generally accepted accounting principles (GAAP) and adjusted (non-GAAP) earnings. Take-Two has given guidance through fiscal 2025 for the latter. And we don't have GAAP earnings guidance, so we don't know how much management is adjusting. This could also lead to disappointments in time.
But Take-Two is bullish on its upcoming slate of games, as evidenced by its bookings guidance. And its track record suggests it can maximize the earnings potential for Zynga. These factors lead me to believe that Take-Two stock can be a market beater over the next five years, and it's why I plan to let my Zynga shares convert to Take-Two shares.
