Double Take on Take-Two

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Several days ago, we covered Electronic Arts (EA), which had modestly outperformed the major indexes on what was a thrashing of a day.

The reason – takeover rumors.

It was during that analysis we started to look a bit more into Take-Two Interactive (TTWO).

We have to admit, par of it came from an argument amongst our staff about whether Grand Theft Auto or Madden was a better game.

But given our bullish outlook on the video game space, we wanted to offer a broader look at one of the other top players that consistently shows up in the top five search results amongst financial pros.

Plus, Take-Two has something EA doesn’t – mobile.

Take-Two Interactive’s Business 

Take-Two Interactive Software (TTWO) develops, publishes, and markets video games through Rockstar Games, 2K, Private Division, and Zynga. 

You can find their games on PC, mobile, gaming consoles, tablets, and mobile phones. Users can download their games or buy them the old-fashioned way at physical retail stores. 

In the summer of 2022, it completed the acquisition of Zynga, paying $12.7 billion. Zynga is the maker of Harry Potter: Puzzles & Spells, Empires & Puzzles, Zynga Poker, and Words With Friends. 

TTWO generates most of its revenues from NBA 2K, Grand Theft Auto, Red Dead Redemption, Empires & Puzzles, Tiny Tina’s Wonderland, WWE 2K22, Toon Blast, The Quarry, and Top Eleven.

During fiscal 1Q 2023, total net bookings grew 41% to $1 billion. Net bookings from recurrent consumer spending grew 48% and accounted for 73% of total net bookings. This goes to show how popular and sticky its games are. 

Its acquisition of Zynga opens up new opportunities in the mobile gaming space.

TTWO believes it can achieve $5.8 billion in net bookings for fiscal year 2023. 

Financials

TTWO has increased its revenues consistently for the last seven years. 

It doubled sales from $1.78 billion in 2016 to $3.5 billion in 2021, and is on pace to have record revenues yet again, for the fifth consecutive year. 

The company’s quarterly revenue growth (YoY) stands at an impressive 35.5%. 

We love the operating cash flow of $210.5 million (ttm) or $2.43 per share. 

It has a current ratio of 0.92x, which is not ideal. However, that’s likely due to its recent acquisition of Zynga.

Valuation 

As we noted when we covered EA, high P/E multiple tech stocks have gotten smashed this year. 

TTWO has been no exception, with shares down more than 30% year-to-date. 

The P/E GAAP (ttm) of 92.2x is notably higher than its 5-year average and considerably higher than its competitors Ubisoft Entertainment (UBSFY), at 61.6x, EA Arts (EA) at 41x, and Activision Blizzard (ATVI) at 32.9x. However, it does beat Roblox (RBLX), which is not a profitable company yet. 

But take heart – Take-Two’s acquisition of Zynga is why its P/E ratio is higher than in years past.

The company carries a price-to-sales ratio of 3.9x, which is significantly better than its 5-year average of 5.5x. Plus, it beats RBLX at 10.4x, EA at 5x, and ATVI at 8x. It does lag UBSFY, which has a price-to-sales ratio of 2.2x.

Profitability

The gaming industry is a high-margin business. 

TTWO boasts a gross profit margin of 58.8%. While that’s impressive, it is not as strong as UBSFY at 87.3%, EA at 74.3%, and ATVI at 71.9%. 

Its EBITDA margin of 19.8% is more or less in line with its competitors, except for ATVI, which is much larger at 32.7%. 

At a net income margin of 4.2%, TTWO beats out RBLX at -25.1%, and UBSFY at 3.7%. But lags EA at 12.4%, and ATVI 24.5%. 

Growth

TTWO has been growing its revenues (YoY) faster than ATVI, and UBSFY. But not as well as RBLX at 57.2%, and EA at 25.9%. However, the firm expects a significant revenue increase from its acquisition of Zynga. Its forward revenue growth of 30.7% is better than its main competitors including EA. The same can be said about its forward EBITDA growth. 

Our Opinion 8/10

Big tech is hunting down and swallowing up gaming companies. 

Most recently, Amazon was rumored to have an interest in EA. 

Meanwhile, Microsoft is in the process of acquiring ATVI. 

The consolidation in the gaming industry does make TTWO a potential takeover target in the future. 

However, even if it doesn’t get acquired, the company has a strong portfolio of games and an exciting roadmap for the future with its purchase of Zynga. 

Shares are down by more than 30% year-to-date. But we believe this is a buying opportunity. It stands to benefit from the Zynga acquisition and strong gaming brands.