Shares of Take-Two Interactive (TTWO 0.30%) delivered outstanding returns to investors over the last decade following the blockbuster sales performance of Grand Theft Auto V, which was released in 2013. And yet, over the last three years, the stock has fallen 11%. Investors can blame inconsistent revenue growth and lower earnings for the stock's sluggish performance.
The stock has rallied 36% so far this year, which can largely be attributed to management's guidance for fiscal 2025, when bookings (a non-GAAP measure of revenue) are expected to jump to $8 billion, or 45% over estimates for fiscal 2024. That's a large increase, even for a company that averaged 16% annual top-line growth over the last 10 years.
NASDAQ: TTWO
Key Data Points
While management has several titles in development, smart investors know there is one game that can pull this level of sales in a single year, and that is Grand Theft Auto (GTA).
Take-Two's Rockstar Games studio, which produces GTA, already confirmed it is working on a new entry in the best-selling series, so an official announcement of a new installment could come very soon. Does this catalyst alone make the stock a buy now? Let's find out how the stock responded in the period around previous releases before checking what expectations are currently implied in the stock's valuation.
New games from Rockstar are a major event
New releases from Take-Two's Rockstar Games are key drivers of the company's growth. All investors have to do is look at the impact previous releases had on the company's revenue.
Take-Two reported a 93% increase in revenue in fiscal 2014 after the launch of GTA V. Again, the release of Red Dead Redemption 2 (2018) drove another 119% jump in revenue during fiscal 2019.
Going by previous timelines for Rockstar releases, the next GTA release would likely be during fiscal 2026 at the earliest. GTA V was first announced in October 2011 and released two years later. Likewise, Red Dead Redemption 2 was initially disclosed in the fall of 2016 before launching in late 2018.
How did the stock respond to these releases? Between the Oct. 25, 2011, announcement date and GTA V's official release on Sept. 17, 2013, the stock rose 11.7%. In the five years following the initial announcement of the game, the stock tripled in value.
Rockstar Games initially hinted at the pending release of Red Dead Redemption 2 in a tweet on Oct. 17, 2016. Between that date and the game's official release on Oct. 26, 2018, the stock rose another 181%.
Red Dead Redemption 2 was a major success. The game contributed as much revenue to the business as the initial sales of GTA V. In the five years following the game's initial unveiling, the stock climbed 280%.
However, investors shouldn't buy a stock based on future growth expectations alone. It's equally important to see what expectations are already implied in the stock's valuation using standard measures like the price-to-sales ratio and price-to-earnings. As we'll see in the next section, a key reason the stock climbed over the last decade was a low starting valuation.
The market won't be caught by surprise again
The success of GTA V and Red Dead 2 were major sales drivers. But we can't forget that the stock also got a boost from the growth of earnings per share, as Take-Two benefited from the shift to a lucrative digital distribution strategy for game sales that lifted the company's profit margin. These opportunities were not on Wall Street's radar a decade ago. Because of this, the stock traded at a low price-to-sales (P/S) ratio of 1.39 in 2013. By 2018, the stock was trading at a more expensive P/S multiple of 7.74. It's no surprise that after reaching that premium, the stock hasn't moved higher over the last five years.
The stock currently trades at a lower P/S ratio of 4.32, but on a price-to-earnings basis, Take-Two is expensive, trading at 44 times the consensus earnings estimate this year. The higher premium could limit the stock's gains, so I wouldn't rush to buy the stock just yet.
TTWO PS Ratio data by YCharts
We're likely a few years away from the release of the new GTA title, as the game hasn't been officially announced yet. The game is a big catalyst, but investors will have plenty of time to build a position in the stock.
Investors also have to factor in the possibility of game development delays, which are typical in the video game industry, as well as the chance that sales don't quite live up to expectations.
For these reasons, I would keep the stock a small position as part of a diversified portfolio right now. The high expectations already baked in the stock price won't allow for the explosive returns investors saw 10 years ago.
