Leon Neal
Thesis
Earlier in October, I covered Take-Two Interactive Software, Inc. (NASDAQ:TTWO), where I discussed TTWO’s growth potential going forward in the near term. Today in this article, I will be covering the company’s recent Q2 2024 result, the strong interest in GTA VI’s trailer, and the gaming industry outlook in the near term. TTWO posted another quarter of strong performance in FY Q2 2024, however, the highlight for the previous quarter was GTA VI’s recent trailer release, which was received with strong interest and I believe the game has the potential to break records as the fastest-selling video game ever. I remain positive on the company’s long-term growth prospects and maintain my buy rating on the stock.
FY Q2 2024 Review and Outlook
Take-Two Interactive Software, Inc. reported another quarter of impressive performance during FY Q2 2024, posting bookings of $1,445 million and EPS of $1.42, beating market expectations by $0.39. The company’s results alleviated any concerns regarding the company’s near-term demand and any softness in the gaming market. Although mobile revenue was down by 7% YoY, improved unit sales for GTA V and increased spending on Grand Theft Auto Online more than offset this decline. The management kept the guidance for the full year unchanged. TTWO’s guidance for FY25, with over $8 billion in bookings, implies a significant increase in content leading up to March 2025. This suggests that the development process is progressing well. Given the forward guidance, I have increased confidence the TTWO is well-positioned to capitalize on the multi-year growth path with a higher multiple.
Global Gaming Could Remain Tepid in 2024
The video game industry could contend with another year of weakening consumer sentiment, with players sticking to the franchises they know and not the new releases they don’t. Ubisoft could be the name to watch in 2024, with releases that include Assassin’s Creed Codename Red, Star Wars Outlaws, Skull and Bones, and mobile titles like The Division Resurgence and Assassin’s Creed Jade. Electronic Arts is likely to see annual refreshes for sports franchises EA FC and Madden. Take-Two will likely refresh its NBA 2K and WWE 2K franchises, though attention will be focused on any information about Grand Theft Auto IV, due in 2025.
The use of generative AI in video game development appears poised to accelerate in 2024-25. The technology is gaining ground in nonplayer-character conversations, wider in-game assets, and larger variations in procedurally generated level designs. Still, I don’t think gen AI will be the key to a particular title’s success, but can help hasten a game’s development by finding and fixing bugs before release and adding more depth to digital worlds.
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GTA VI Sales Could Break Records
I believe Grand Theft Auto VI has the potential to break records as the fastest-selling video game ever and could surpass the record set by its predecessor, GTA V, and achieve sales of over 40 million copies in 2025, with the potential for even higher sales of more than 55 million within the first year in a more optimistic growth scenario. The high level of engagement with the GTA VI trailer, which received over 105 million views in a single day, suggests strong consumer anticipation for this sequel. To put the interest in the trailer into perspective, the trailer for Take-Two’s popular title Red Dead Redemption 2 had 23 million views upon release, while other highly anticipated titles like Cyberpunk 2077 and Starfield had 19 million and 18 million views, respectively. GTA VI’s trailer even outperformed its predecessor, GTA V, which garnered 101 million views. In comparison, the trailer for the popular Call of Duty franchise’s Modern Warfare 3 received only 38 million views.
Valuation
TTWO is currently trading at around 40x forward earnings. Although the stock is currently trading at a significant premium compared to peers like Electronic Arts Inc. (EA) and Activision Blizzard, Inc. (ATVI), I believe the premium is justified given the company’s growth trajectory and GTA’s monetization potential. In terms of valuation, global video game companies have not performed as well as the broader technology industry and the S&P 500 index in 2023. However, Take-Two stood out in 2023, primarily due to the consistent excitement surrounding the release of Grand Theft Auto VI, and I expect the hype to continue through 2024 leading up to the game’s debut in 2025. On the other hand, Electronic Arts and Ubisoft have lagged behind the performance of the S&P 500. I expect TTWO to maintain its premium multiple going forward in the medium-term and maintain my positive outlook on the company, leading to my re-iteration of the buy rating on the stock.
Capital IQ
Investment Risks
GTA VI could be offered at $70, I believe, as a higher price might keep it from developing a large initial player base. Take-Two may sell more expensive deluxe or special editions, which could include in-game cosmetics, physical goods, and potential online currency as a way to drive increases in blended MSRP. The major risk to consensus for GTA VI might be further delays, which could push a portion of revenue that would otherwise be generated in calendar 2025 to 2026. The predecessor GTA V was supposed to launch in the Spring of 2013 but was four months late. Though such holdups may disappoint investors in the near term, they could make the difference between a poor launch and a successful one.
Conclusion
TTWO reported impressive performance during FY Q2 2024, and the management’s forward guidance for FY25 was robust. GTA VI represents a transformative multi-year growth opportunity for Take-Two. I believe GTA VI has the potential to set new records as the fastest-selling video game, as evidenced by the remarkable engagement with its trailer, which garnered over 105 million views within a single day. My outlook for the company’s long-term growth remains bright, and I maintain my buy rating on the stock.
