With the economy slowing, some investors may be wondering how the best video game producer Take-Two Interactive (TWO 2.49%) will hold up in the short term.
Video game sales have definitely declined this year. The trend is most pronounced in gaming hardware. Microsoft reported Xbox hardware revenues were down 11% in the quarter ended June 30. Logitech Internationala leading manufacturer of gaming peripherals, reported a 16% decline in sales in gaming products in its most recently reported quarter.
Take-Two will report its earnings for those three months on Monday, August 8 Activision Blizzard just reported a drop in revenue and monthly active users for the second quarter, so expectations for Take-Two are low. Pessimism has driven the share price down by 25% so far.
That said, there are two key aspects of Take-Two’s business that the market seems to be missing that could create it as a buying opportunity.
Take-Two can perform during a recession
One advantage video games have over other entertainment options during a recession is their value per dollar. A new release that costs about $50 can provide tens or hundreds of hours of entertainment spread over months or even years. And that doesn’t count the number of free-to-play titles available, including Electronic art‘ Apex Legendswhich is currently one of the most popular games.
The high relative value of video games as a form of entertainment may explain why Take-Two was able to grow its sales during the 2008 financial crisis. Between the end of calendar 2007 and 2009, Take-Two’s revenues grew 2.5%, with a sharp increase in 2008 after the release of Grand Theft Auto IV.
TTWO Earnings Data (TTM) by YCharts
The company went on to release Grand Theft Auto V in 2013 and that title has given players tremendous value over the past decade. The latest installment in the series continues to make one of the biggest contributors to the company’s revenue every year.
Grand Theft Auto Online, which also debuted in 2013 and allows players to complete missions with friends, continues to receive new updates that keep players coming back for more. In the company’s fourth quarter of fiscal 2022, which ended March 31, that game’s player base was 74% higher than the same quarter in fiscal 2019 — an impressive increase for a game that’s been out for nine years.
Take-Two just launched the online multiplayer feature as a standalone title that can be purchased for $20 on Sony‘s PlayStation 5 and Microsoft’s Xbox Series X/S. And it further capitalizes on the game’s popularity with a new subscription service (GTA+) which gives players additional content.
Furthermore, the company should see more growth from its best-selling NBA 2K franchise this year. Wedbush Securities analyst Michael Pachter expects: NBA 2K23slated for a September release, to drive record sales for Take-Two.
The stock offers significant long-term upside potential
Take-Two was able to thrive during a severe recession in 2008, but most of its sales increase over that period was due to the launch of GTA IV. While the company has a deep pipeline of new releases planned for the next three years, no major new titles are coming this year except NBA 2K23 to boost sales significantly.
One catalyst worth checking out, however, is the acquisition of mobile game maker Zynga, which Take-Two just completed in May. The addition of Zynga brings the best mobile games like Farm village and Words with friends to the Take-Two catalogue. Analysts expect the combined company to grow its booking count (a non-GAAP measure of revenue) by 85% in the company’s current fiscal year.
The ongoing opportunities to monetize with Grand Theft Auto and Zynga’s mobile company make Take-Two one of the best options among the best video game stocks right now. Any surprising growth of NBA 2K23 would be a bonus.
Analysts expect Take-Two’s earnings per share to double over the next five years to $11.43. The stock has traded more than 30 times its earnings recently, but applying a P/E ratio of 25 to that estimate would still put the stock price at $285 in 2027 — more than double its current quote.
John Ballard has no position in any of the listed stocks. The Motley Fool holds positions in and recommends Activision Blizzard, Logitech International, Microsoft and Take-Two Interactive. The Motley Fool recommends Electronic Arts and recommends the following options: Long January 2023 calls $115 on Take-Two Interactive. The Motley Fool has a disclosure policy.
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