Huge news hit the video game market in the past few days. Rockstar Games, a studio owned by Take-Two Interactive (TTWO 0.72%), announced that the first trailer for a new Grand Theft Auto (GTA) game will be released on Dec. 5. Likely called GTA VI, it follows up on GTA V, which was released over 10 years ago and became the best-selling single entertainment title in history. To be clear -- that is the best-selling title across all forms of entertainment, not just gaming.
Shares of Take-Two have already soared 50% this year in anticipation of the game's release, with investors betting it will lead to a step-change in earnings power for the parent company. Does that make the stock a can't-miss opportunity in 2024? Let's investigate further.
TTWO Total Return Level data by YCharts
10 years later, a sequel emerges
GTA V was released in 2013 as a premium title for the Xbox, Playstation, and various PC gaming platforms. As the name implies, it has more mature content focused on virtual criminal worlds. With a fantastic story and open online gameplay, GTA V was a smashing success, selling 32.5 million units in 2013 and 12.5 million in 2014. At a $60 price point, that adds up to $2.7 billion in sales.
But what made GTA V remarkable is the long shelf life of the title. Spanning across multiple console generations, GTA V maintained relevance with frequent updates to game content and GTA Online, an online world where players could interact with each other. This creates a nearly endless amount of opportunities for people to play GTA V even after they finish the core storyline of the game.
At the end of last quarter, Take-Two updated investors with the cumulative sales for GTA V since launch. The single game title has now sold a whopping 190 million units. No other gaming title comes even close to hitting this mark.
At an estimated $60 price point, GTA V has generated $11.4 billion in cumulative revenue for Take-Two before considering in-game purchases. In-game purchases are a large portion of Take-Two's business today, and likely add billions of dollars to this revenue total.
Now, with the first trailer about to launch for GTA VI, Take-Two could be poised to see a huge boost to its revenue yet again. But what will the financial impact be?
One game, but a huge financial effect
When looking at the size of Take-Two's business, it is pretty clear how much GTA VI can impact its financials if it can replicate or surpass the commercial success of its predecessor.
Over the last 12 months Take-Two generated $5.4 billion in revenue. Now, some of this is from GTA V (it is still selling 5 million units per quarter), which will go away once GTA VI launches. Either way, when you do the math the results are stark.
Premium games sell for $70 today, with other special add-ons that can bring the titles above $100 for diehard fans. In foreign markets, titles get sold for much less due to lower consumer purchasing power. Balancing both these effects, I think assuming an average selling price of $70 for GTA VI is reasonable. If it can sell 40 million units within the first 12 months after release, that equates to $2.8 billion in revenue, or more than half of Take-Two's trailing 12-month revenue.
Remember, too, that this does not include sales from add-on content on GTA Online, which will assuredly be continued with this new game release.
Even before its merger with Zynga, the majority of Take-Two's revenue came from recurring customer spending. Add this into the mix and GTA VI has the chance to contribute multiple billions in revenue to Take-Two's income statement for the next few years, if not longer.
TTWO Revenue (TTM) data by YCharts
Don't buy a video game stock based on one title
GTA VI has a ton of potential. But there is more to a video game stock than one title. There are two things that matter for investors in the big picture.
First is the culture of game production at Take-Two's studios. You can't just rely on one game to propel your success in perpetuity. There needs to be consistent game releases that drive revenue growth year after year. The good news is that Take-Two has a fantastic track record of making hit games. Its NBA 2K franchise dominates the sports gaming market, while its Red Dead Redemption series has some of the highest-rated games (it has also sold 81 million units worldwide).
Second is valuation. Take-Two trades at a market cap of $27 billion. Video game companies have lumpy earnings and revenue, which is why Take-Two hasn't generated much in profits today. A lot of spending is likely going into developing GTA VI. But when they are humming, these game producers typically can hit profit margins of 20%, if not higher.
If Take-Two's revenue grows to $8 billion after GTA VI releases, that will mean $2 billion in annual profits, or a price-to-earnings ratio (P/E) of just 13.5.
With the market currently trading at a P/E above 20, this looks cheap for video game investors with a longer time horizon. If you think Take-Two has a strong culture of game production and GTA VI will be a smashing hit, this stock is still a buy even with shares up 50% this year.
