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While the market remains only a few percentage points off its peak, videogame stocks are down 20% to 40% from last year’s highs. Much of the blame goes to Fortnite, which threatens the traditional business model of selling games at $60 a pop.
But amid the worry, there may be an attractive buying opportunity. Like the movie industry, the strength of videogame franchises are critical in predicting future financial performance. A simple rule of thumb is buy the content companies that are making the highest quality products and are delighting consumers in the process.
In the film business, that means
Walt Disney
(ticker: DIS). Among publicly traded U.S. videogame makers, it’s
Take-Two Interactive
(TTWO). Japan’s
Nintendo
(NTDOY) certainly qualifies, as well.
While gaming giants
Electronic Arts
(EA) and
Activision Blizzard
(ATVI) deal with disappointing releases, questionable pipelines, and declining enthusiasm for their non-sports franchises, Take-Two’s core game properties have proven to be stronger than ever.
Take-Two chief executive Strauss Zelnick told Barron’s that the company has made quality games its priority. “We’ve been criticized at times for missing [release] dates, but I think we’ve seen it reflected in extraordinarily high quality,” Zelnick says. “That’s what drives these amazing results.”
Zelnick cited the company’s industry-best game ratings, according to review aggregation site Metacritic. Take-Two’s willingness to postpone its major releases to ensure it gets each game right has impressed analysts. “Take-Two differs from most other publicly traded publishers in that it has historically resisted the pressures from financial investors and shareholders,” Joost van Dreunen, co-founder of Nielsen-owned SuperData, wrote in an email. “Prior to the release of GTA V, for instance, its subsidiary Rockstar pushed back the launch date despite criticism from fans and financiers. It resulted in one of the most successful content releases in the history of entertainment.”
The Grand Theft Auto V game that Dreunen is referring to sold 110 million copies. Take Two’s Red Dead Redemption 2 is up to 24 million games sold since its release last October. Ten million copies is considered a home run in the videogame industry.
Zelnick noted the company’s latest NBA 2K game is also on track for a record in total sales.
Not only are the titles selling, gamers are engaged in playing them. That bodes well for the future. Take-Two is the only publisher with two games—NBA 2K19 and Grand Theft Auto V—that consistently rank in the top five of the “most played” list on the Microsoft Xbox console. The company’s basketball game is usually ranked No. 2 after Fortnite.
Another good argument for Take-Two is its general avoidance of so-called “loot boxes,” an in-game slot machine that sells digital items to enhance game play. In April, this column detailed the industry’s troubling reliance on the loot boxes, which has been likened to gambling.
Take-Two revealed on its earnings call this week that loot boxes were responsible for less than 3% of its sales over the past year. Other game publishers, by contrast, have an estimated double-digit revenue exposure to the loot boxes, according to Cowen.
Last week, Sen. Josh Hawley, a Missouri Republican, announced that he will introduce legislation banning “pay-to-win” and “loot box” videogame monetization that exploit children, joining Sen. Maggie Hassan, a New Hampshire Democrat, as a critic of the practice.
Take-Two shares are down 23% from its fall 2018 high, but investors may be starting to come around to the story. The stock rose 3% this past week. On Monday, the game publisher gave an adjusted revenue forecast range for its fiscal 2020 of $2.5 billion to $2.6 billion, versus the $2.8 billion average estimate. Despite the lower than expected guidance, Take-Two shares rallied as analysts cited the company’s history of beating its forecasts.
“They gave a very conservative guide, in particular, on what the recurrent revenue growth will be for the year,” BTIG media analyst Brandon Ross said.
Earlier this month, Cowen analyst Doug Creutz said Take-Two is also the best stock to buy in anticipation of the next generation of consoles. He predicts new console launches will arrive late next year and notes that the videogame stocks as a group have outperformed the broader stock market by 26% on average in the 12 months preceding major console launches in 2000, 2005, and 2013.
Last month,
Advanced Micro Devices (AMD)
said its semicustom business, which makes chips for the Sony PlayStation and Microsoft Xbox consoles, would return to growth in 2020. That’s all but confirmation that the consoles will launch next year.
BTIG’s Ross thinks that Take-Two’s best-in-class games—and its modest size—makes the company a prime acquisition candidate, for either a rival gaming firm or a broader tech giant. Take-Two has an enterprise value of about $11 billion versus an average of $30 billion for its major U.S. rivals.
Ross has a Buy rating for Take-Two shares and a $142 price target. Take-Two closed near $107 on Friday.
Take-Two is on the cusp of another big catalyst—the release of Grand Theft Auto VI. The last three titles in the franchise were released in 2013, 2008, and 2004, suggesting the next one is due out soon.
When asked for comment on a potential GTA VI release date, a Take-Two spokesman said, “We do not comment on rumors or speculation, and our labels make their product announcements.”
But Take-Two has begun to make subtle hints about the game to investors. The stock could take off once the timing is confirmed.
Write to Tae Kim at tae.kim@barrons.com
