Take Two Interactive has been on my radar since the start of 2013, when one of my fanatic video gamer friends from college told me he had bought the stock in anticipation of the new Grand Theft Auto to be released in September 2013.
Well, I wish I had bought the stock when he did, as TTWO has zoomed higher in 2013, up more than 50% in 2013. The stock broke out above 2 year resistance around $17 on July 31st, as excitement surrounded the game’s release date:
However, despite a strong reception among video game aficionados, and robust sales to boot, the stock has stagnated since that breakout.
I had forgotten about TTWO until I saw @firstadopter’s Twitter rant last week, where he sounded off on what he viewed as very strong prospects for Take Two over the next couple years, anchored by Grand Theft Auto’s success. Firstadopter is one of my favorite Twitter follows for his no-nonsense dives into company fundamentals, and here were some highlights of what he said about TTWO:
$TTWO Merrill this morn GTA V digital content ALONE will produce 80c-$1.00 EPS vs. $1.06 FY15 est. Add MANY next gen titles in FY15 to that
I’m not good at math, but if $TTWO street est. $1.06 EPS for next FY. GTA V content ALONE $1.00 EPS. Add MANY next gen games earnings on top
$TTWO makes BEST NEXT-GEN games people. Market doesn’t realize this. What other next-gen game (NBA2K14) did +45% y/y units in Nov? ONLY TTWO
$TTWO next-gen title up 45% y/y, $EA and $ATVI next-gen titles down huge double-digits. This isn’t rocket science folks
$TTWO 3 major games in 2013: GTA V, Bioshock Infinitie, NBA2K14 ALL out-sold their previous iteration. Peer-less quality in the industry
Here’s a stellar interview where Strauss Zelnick, Chairman/CEO, discusses the broad video game industry on a macro basis, displaying his obvious foresight and focus on high quality games in order to beat the competition:
A few interesting snippets:
-The median age of the avid video gamer is 37. “It’s not just teenagers in the garage anymore”
-Older women are a major factor in the social gaming space
-We’re totally focused on the customer experience, because when you fulfill that, we think the money generally follows
-I can’t really think of a better alignment of the planets for us. We still have to deliver the highest quality.
-Our covenant with our consumer is that all of our titles have the highest quality rating in the industry.
He’s also quite aware of the crucial nature of graphics quality for their sports and battle games. GTA’s and NBA 2k14’s major selling growth this season is certainly an impressive data point that confirms TTWO’s best-in-class position.
Now, while the gaming community has been thrilled with Take Two over the past 5 years, the investor base has been much less excited. The stock is actually in the same place it was more than 10 years ago. The stock was hit in late November as Carl Icahn exited his 11% stake, which he acquired about 4 years ago, by selling his shares back to the company at $16.93. (Icahn still did quite well since he bought in December 2009.)
Why haven’t TTWO shares kept up while TTWO’s game titles have soared in popularity?
One big problem has been the volatility of the stock’s earnings stream. Here is the EPS over the past 10 years:
$1.26 in 2004
($0.27) in 2005
($2.00) in 2006
($1.63) in 2007
$1.98 in 2008
($0.99) in 2009
$1.71 in 2010
($0.36) in 2011
($0.98) in 2012
$3.68 expected in 2013
The nature of the video game business is that sales pick up dramatically when new consoles come up. The Playstation 4 and the Xbox One were both released in November 2013, and Take Two management was able to release GTA and NBA 2k14 at the same time as those new console releases, yielding a huge 2013 earnings number. In dry years near the end of a console cycle, like 2012, the company takes on expenses with not enough sales to turn a profit.
But total EPS over the past 10 years is only around $2.00 in total, or about $0.20 per year, a piddling sum, and a big reason why TTWO shares have languished. Yet, there are 2 major reasons for optimism:
1) Management has been much better since TTWO’s 2007 accounting scandal. Zelnickmedia, led by Co-Founder Strauss Zelnick, was at the head of a takeover of the company along with other large investors. Mr. Zelnick has been Chariman and CEO since January 2011, but heavily involved since 2007.
2) The company’s library of content is the best in the industry, as cited at the start, but more importantly, management expects annual profitability for the foreseeable future (as a result of that much more flexible library of content).
CEO Zelnick addressed some of the concerns about business volatility at the Credit Suisse Technology conference earlier this month. Highlights from the transcript:
So we didn’t lose anything in terms of what we had and we added a whole lot, specifically the introduction of at least one new intellectual property every year since 2007. Today we have nine franchises that have sold each at least more than 5 million at release. It’s extraordinary. I think we have the best collection of owned intellectual property in the business. We have I think what is now and certainly wasn’t before the top worldwide marketing and distribution system. I think most people in the business would agree with that, if you look at our results pound-for-pound. And we have for sure the best creative teams in the business. So those are the assets we have.
…
We’re being more forthcoming than we’ve ever been before. We’ve said – I’m known to be a pretty conservative with not much of a stock touter. And we’ve said we expect to be profitable next year and for the foreseeable future. Those are not words I use lightly, and I have yet to be wrong when I’ve said things like that, so that’s a good deal of guidance. We’ve also said we have more than 10 projects in development for next-gen, both for current franchises sequels, and new intellectual property. That’s a lot of color on our upcoming release schedule, and a great deal of color.
TTWO is only a $1.7 billion market cap company, even though it might be the leading video game publisher in the market today. The company’s past hiccups have hurt its reputation, but current business results and the future forecast are quite bright. If TTWO does indeed earn 1-3 dollars per share in the coming 2-3 years, this stock is significantly undervalued. We are considering it for addition to the long-term investment portfolio given what looks like asymmetric risk/reward to the upside.