Take-Two Interactive: The Best Video Game Stock To Buy Right Now?

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The video game industry has provided monster winners for video game players and this has resulted in monster gains for shareholders over the past decades. With nearly $ 200 billion in consumer spending on video games each year (a constantly growing number), game publishers like Electronic arts and Activision Blizzard crushed the S&P 500 index over the past 20 years.

Another video game publisher with a solid background is Take-Two Interactive (NASDAQ: TTWO), whose share price has risen by over 1000% in the past 10 years alone.

But some recent delays in games and a large sell-off in video game stocks have caused Take-Two’s stock price to drop nearly 30% this year. Does this offer investors a buying opportunity to access what has been a long-term compounder?

Image source: Getty Images.

Sustainable growth from existing games

Take-Two owns and publishes many different game franchises, but the most important is Grand Theft Auto (RGT). The company last released a bounty RGT title in 2013, but it has steadily increased engagement with the game through regular updates and GTA Online Add. With the latest Xbox and PlayStation game consoles released last year, Take-Two offers an updated version of GTA V for use on these new consoles, further extending the lifespan of this best-selling game in the United States

The game was originally slated for release in November, but was recently pushed back to early 2022. Along with the release, GTA Online will be available as a standalone game; historically, you had to buy GTA V to get there.

Other important Take-Two franchises are Red Dead Redemption (RDR) and NBA 2K. NBA 2K is very similar to FIFA Where Madden NFL, with an annual release, and a popular online and eSports community. RDR is similar to RGTMais’s play style has only ever released two games in its history. The last, RDR 2, launched in 2018, has sold 38 million copies since, making it the second best-selling video game title in the United States (based on dollar sales) in the past three years, according to a report by NPD Group. Take-Two reproduced the RGT strategy with RDR, the construction of a stand-alone RDR online game which will hopefully increase its popularity.

Investors can see the success of this expansion strategy by noting the growth in recurring expenses of Take-Two customers. This segment grew net bookings at a compound annual growth rate (CAGR) of 37% from fiscal 2017 to fiscal 2021, significantly exceeding the company’s overall net bookings at a CAGR of 17%.

Solid product pipeline

One of the concerns investors have with Take-Two is what hit games will be released in the next few years. Management has not set a date for GTA VI, and a new RDR the game won’t come for a while due to the relatively recent RDR 2 launch. Yes, recurring customer spending should continue with the company’s online strategy and NBA 2K sales, but to grow this business significantly, Take-Two is likely to need another successful game over the next three to five years.

It will almost certainly be GTA VI, which the company has had time to work on for almost a decade now, but Take-Two has a huge pipeline of other games that could help it grow as well. According to the management’s latest investor presentation, Take-Two has 62 new releases coming over the next three years, including more than 20 games associated with its three biggest franchises. To help launch these games, the company has accelerated the growth of its employee base. Take-Two now has 5,000 employees working on game development, up from just 2,000 in 2015. While none of these games are guaranteed, with Take-Two’s track record of running over the past decade, it is likely that the company’s income and profits will be much higher in three to five years.

Big pile of cash and a reasonable valuation

The stock selloff has helped reduce Take-Two’s valuation in recent months. With a market capitalization of $ 17 billion, Take-Two stock trades at an operating price-to-cash flow (P / OCF) ratio of 42 based on management’s forecast for fiscal 2022 ( the year we are currently in). It may sound costly, but investors should remember that video game companies have somewhat irregular finances due to irregular game releases.

Last year Take-Two generated $ 912 million in operating cash flow, and the year before it generated $ 686 million. The company’s expansion strategy with the new consoles and the massive three-year pipeline, and the eventual release of GTA VI will likely give Take-Two’s annual cash flow a significant boost in a few years.

Finally, investors should like that Take-Two has $ 2.5 billion in cash on its balance sheet and minimal debt. This gives management the flexibility to invest in new securities or return that money to shareholders through redemptions or dividends.

Overall, Take-Two Interactive has a strong track record in game development, has increased its product pipeline, and is trading at a reasonable valuation – if you have a multi-year time horizon. This makes the company one of the most attractive, even the Most attractive video game stock for investors to buy right now.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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