Top video game producer Take-Two Interactive (TTWO -0.03%) recently reported another disappointing quarter where management had to cut its near-term outlook due to a challenging environment.
Management also said more players are shifting their time and money to blockbuster games, which would include Rockstar Games' Grand Theft Auto V and Red Dead Redemption 2.
While this shift is hurting the performance of some of the company's new titles, more time spent playing major franchises will inevitably drive growth for the companies with the titles that draw a big audience.
The market is starting to see how this will play to Take-Two's strength, which is why the stock is up since the earnings release despite the cut to fiscal 2023 revenue guidance. Here's why Take-Two's best days are still ahead.
Take-Two owns one of the most popular properties in the industry
Grand Theft Auto V is a major draw for millions of gamers, and it continues to sell more copies every quarter. The nine-year-old video game surpassed 175 million units sold, up about five million units from the previous quarter and 45% higher than the same quarter three years ago.
Although the company is staying tight-lipped on the development timeline, Take-Two will have a monster on its hands when the next Grand Theft Auto title launches. It will be launching with better graphics on the new hardware available, and it will be greeted by the largest installed base of players in the history of the franchise.
Investors are getting a big discount on Take-Two stock after its 41% slide last year. Its annual revenue more than tripled over the last decade with the additional boost from acquiring Zynga last year. The trends in the gaming industry are playing to its advantage as a producer of blockbuster titles.
During the latest earnings call, CEO Strauss Zelnick said he expects even more growth over the next several years.
Data by YCharts.
Why Take-Two is set for long-term growth
One analyst asked management on the earnings call, "And then Strauss, some of your competitors have suggested the market is shifting towards these mega franchises. Curious if you agree with that premise?"
Zelnick's response: "Yes, we emphatically agree."
He went on to explain why Take-Two is perfectly positioned for more growth, adding, "We believe that we have the best collection of owned intellectual property across console, PC, and mobile in the marketplace. And our approach has always been to bring out new iterations of beloved franchises."
The demand for major titles has been building for at least a decade. Activision Blizzard was probably the earliest of the big three U.S.-based game companies to recognize these trends and position its game portfolio accordingly when it acquired World of Warcraft creator Blizzard Entertainment in 2008.
Electronic Arts has also been moving in the same direction. Considering the weak macroeconomic environment, the maker of FIFA and The Sims said it would invest more resources into its biggest growth opportunities to drive better sales performance.
Take-Two has 11 franchises under its tent that have sold over five million units each in an individual release. Their strength explains why several more installments are planned through fiscal 2025. These are relatively low-risk opportunities, since these franchises already have an existing base of fans.
It's time to buy
Investors should pay attention to Zelnick's commentary on the call. Despite the near-term cut to guidance, he expects the new releases coming over the next few years to deliver "sequential growth and record performance over the next several years."
The stock's rise since the earnings report, despite another cut to guidance, is a signal the market has already priced in the macroeconomic headwinds and is looking forward to what's coming from Take-Two's development pipeline. With the stock still down almost 40% since the start of 2022, Take-Two should be a rewarding long-term investment at these prices.
