Take-Two Interactive (TTWO 0.29%) competes in a massive and growing gaming industry. In an attempt to capture a larger share of the lucrative market, Take-Two is investing in growth.
The company is spending to attract talent and recently paid a hefty sum to acquire mobile-gaming company Zynga. To fund its ambitious growth plans, the company tapped the bond markets to borrow $2.7 billion.
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Take-Two Interactive is investing in growth
According to management, there are 2.8 billion gamers worldwide. That's almost half the planet playing video games. Undoubtedly, the proliferation of mobile electronic devices has helped expand the gaming market. Overall, gamers will spend $286 billion by 2025, and Take-Two Interactive wants a healthy slice of that sizable market.
In the past decade, Take-Two has grown from $826 million to $3.4 billion. Despite growing by roughly fourfold, it still has a long runway to expand.
TTWO Total Employees (Annual) data by YCharts.
One way Take-Two is trying to capture more market share is by adding talent. From 2016 to 2021, the company more than doubled its headcount to 5,046. It hopes the added staff will create higher-quality games that sell more units and produce a higher quantity of games. Of course, that strategy risks that the game developers and their creations are insufficient to pay for their added costs.
Indeed, the company has lost money on the bottom line in four of the past 10 years. The losses can partly be explained by the long time it takes to produce new hit titles. Overall, Take-Two has generated robust compound annual earnings-per-share growth of 24.7% in the past decade. Therefore, management can be given the benefit of the doubt that the increased investments will deliver earnings growth.
TTWO EPS Diluted (Annual) data by YCharts.
Zynga is a massive acquisition for Take-Two Interactive
The press release accompanying the announcement of the $2.7 billion bond issue states it will partly be used to pay for the acquisition of Zynga. Take-Two said it would be buying Zynga for $12.7 billion in cash and stock. The price was a 64% premium to Zynga's closing price on Jan. 7. The market disliked the hefty price paid for the acquisition, and Take-Two's stock has been down considerably.
TTWO data by YCharts.
After fully digesting Zynga, management estimates the acquisition will add nearly $500 million in annual bookings and $100 million in cost synergies. Mobile gaming is the fastest-growing segment in the gaming market, and it is Zynga's area of specialty.
In addition to Take-Two's investments in growing its staff over the years, the bond issuance and acquisition of Zynga are further evidence of management's ambitious growth plans. The company has not done an excellent job of delivering a return on invested capital in the past decade. Therefore, you can understand why investors are skeptical of Take-Two Interactive right now.
