Shares of Take-Two Interactive (TTWO -0.69%) have surged more than 45% over the last 12 months as investors look ahead to a monster catalyst next year with the release of Grand Theft Auto VI on May 26, 2026. While that release is expected to drive strong revenue growth, there's a more subtle, and more valuable, catalyst at play that could fuel this top video game stock higher over the next five years.
The key value-creating trigger for shareholders was clearly visible in Take-Two's last quarterly financial report. It posted double-digit revenue growth, while operating expenses dipped. This wasn't just a one-off. Management has made it clear in previous earnings calls that it is actively working to scale the business and increase profit margins over the long term. This is a setup for excellent returns for shareholders.
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Take-Two's cost discipline will lead to explosive profit growth
Take-Two has solid momentum heading into next year. After reporting record revenue in fiscal 2025 (which ended in March), it's on pace to achieve another record year after revenue grew 12% year over year in fiscal Q1 2026.
In the last quarter, revenue grew to $1.5 billion, cost of revenue declined 1% year over year to $559 million, and operating expenses declined 3% to $923 million. This cost discipline increased operating income to $22 million, reversing a year-ago loss of $185 million.
Take-Two delivered significant growth in earnings and free cash flow over the previous decade. However, the acquisition of mobile game maker Zynga led to higher losses over the past few years. But with that integration moving behind the company, Take-Two is about to ramp up its profit engine again.
During the fiscal Q3 2024 earnings call over a year ago, CEO Strauss Zelnick said, "We've always managed Take-Two for the long term, and we have great confidence in our groundbreaking pipeline for fiscal 2025 and beyond, which we believe will enable us to grow our net bookings, increase our scale, and enhance our profitability."
Zelnick added that the company aims to "achieve greater operating leverage," which is Wall Street code for higher profit margins, through a robust cost reduction program as it releases major new titles in its pipeline, which includes Grand Theft Auto VI.
Take-Two's future profitability is undervalued
Take-Two's outlook for fiscal 2026 calls for a net loss of between $377 million to $442 million. That's expected as it will likely ramp up marketing expenses leading to the release of Grand Theft Auto VI. Given that the previous installment in the series has sold more than 215 million copies, it shouldn't take long to recover those costs, as there is a lot of excitement for this new release.
The company has several other releases in the pipeline from existing franchises that are expected to supercharge its revenue. Wall Street analysts currently anticipate a surge to $9.2 billion in fiscal 2027, which will include the first sales of Grand Theft Auto VI, and increasing to $9.8 billion by fiscal 2030.
However, the combination of higher revenue and cost leverage will drive significant margin expansion. Analysts expect Take-Two's operating margin to increase from 12% in fiscal 2026 to 31% by fiscal 2030. This will translate to annual free cash flow of $3 billion in the next five years.
The stock's market cap is currently $42 billion, putting its price-to-free cash flow (P/FCF) multiple at 14 based on fiscal 2030 estimates. That leaves plenty of room for the share price to climb.
For perspective, Electronic Arts has averaged a P/FCF multiple of 21 over the last three years and currently trades at a 25 multiple. Take-Two should trade at a higher valuation given the growth opportunity with Grand Theft Auto, which is the hottest video game property in the industry, and the company's stated goal to manage costs to grow profits. A P/FCF multiple of 28 for Take-Two would lead to a double for shareholders from the current share price.
Overall, Take-Two's focus on margin expansion ahead of a blockbuster new release makes it a compelling investment for long-term investors.
