We're winding down the spring earnings season, which means it's time for the large video game publishers to report their quarterly results. On Monday, May 16, Take-Two Interactive (TTWO 1.50%) put out its Q4 and fiscal year 2022 earnings. The publisher of Grand Theft Auto (GTA) and NBA 2K missed Wall Street's bookings estimates for the period; however, given management's commentary about its content slate over the next few years, the stock popped more than 10% the next trading day.
In the past, video games have proven to be resilient businesses in a recessionary environment, which we might be heading into over the next few quarters. Does that make Take-Two stock a buy, even after this 10% earnings pop? Let's take a look.
Solid fiscal year results
In Take-Two's Q4, which covered the first three months of 2022, net bookings (the revenue equivalent for video games) hit $846 million, up from $785 million a year ago. These results were right in line with the company's internal expectations, as it continues to get people to pay for its hit games like GTA V, Red Dead Redemption 2, and the NBA 2K franchises. In fact, even though GTA V is almost 10 years old, Rockstar (the division that produces it) has sold 20 million copies in the past 12 months.
These game sales are profitable on their own, but really drive people to recurring consumer spending on things like GTA Online. This segment accounts for 60% of Take-Two's overall bookings as of Q4 2022, making it the most important growth driver for this business. Recurring consumer spending has compounded at a 21% rate since fiscal year 2018. Investors should expect this solid growth to continue over the next five years as well.
Looking to profitability, Take-Two generated $425 million in adjusted operating cash flow last fiscal year. This is down from fiscal year 2021, when the company generated $920 million in adjusted operating cash flow, but that is because it has been multiple years since the company has published one of its blockbuster titles from GTA or Red Dead Redemption. The last of these was in 2018 with the release of Red Dead Redemption 2.
Focus on fiscal year 2024
Like the movie business, Take-Two's earnings are a bit lumpy and rely on consistently producing popular gaming content. Right now, the company is in a heavy investment period, with 69 titles expected to come out over the next few years. Since fiscal year 2019, it has almost doubled its developer headcount, hitting 6k people at the end of fiscal year 2022 as it tries to build out these new titles.
A lot of these resources are going to GTA VI (the title is unnamed right now), the next premium update to Take-Two's top franchise. A date hasn't been set for its release, but reading through the company's projections on the conference call, it is likely coming within the next two to three years. In fiscal years 2024 and 2025 (calendar years 2023 and 2024), management is projecting net bookings to set new records, and for the company to significantly ramp up its profitability. This likely means the next GTA title is coming out sometime during those years.
As investors in Take-Two, this is the most important game to focus on. Its success will determine the direction of adjusted operating cash flow over the next few years.
Don't forget the Zynga acquisition
If you're looking at Take-Two as a potential investment, it is important to follow its upcoming acquisition of Zynga, one of the largest mobile game developers in the world. The deal, valued at an enterprise value of $12.7 billion at the time of the announcement (the value changes with Take-Two's stock price because it is issuing shares to finance the purchase), will bring huge changes to Take-Two's business.
First, it will diversify the company's business into mobile games. In calendar year 2021, Zynga generated $2.8 billion in net bookings, just below the $3.4 billion Take-Two generated in fiscal year 2022. Post-merger, Take-Two will have much more exposure to the mobile gaming sector, which is expected to generate $125 billion in revenue this year and grow at a 9% rate through 2026.
If Zynga can continue growing its core properties while also helping Take-Two ramp up its mobile properties from franchises like GTA and Red Dead Redemption, the acquisition could be quite accretive for the combined enterprise. There is a giant mobile opportunity to go after.
So is the stock a buy?
It is hard to put a value on Take-Two stock given how lumpy its earnings can be and the upcoming Zynga acquisition. However, if we take management's word that profitability will inflect higher two years from now, the Take-Two business itself looks very cheap right now.
Why? Well, again, it is hard to make exact predictions, but if we take last year's $425 million in adjusted operating cash flow as a base, management could be expecting to generate $1 billion in annual cash flow a few years from now. At a market cap of $13.5 billion, this feels very cheap, especially considering Take-Two's upcoming game slate and track record of delivering high-quality titles. From my chair, this makes the stock a buy right now.