Take-Two Interactive's Growth Is Not Done Yet

Aug.21.14 | About: Take-Two Interactive (TTWO)

Summary

Take-Two Interactive's strong gaming pipeline has allowed the company to deliver growth even in sluggish times.

Take-Two Interactive is also making smart moves to tap the online gaming market in China.

Take-Two's valuation and future games indicate that the company's strong performance will continue.

Game publisher Take-Two Interactive (NASDAQ:TTWO) is riding the success of its latest games. The stock has gained an impressive 27% in 2014, and after robust first-quarter results, the company can get even better. Take-Two was able to deliver non-GAAP revenue growth in the first quarter, which is commendable as the company didn't have any important fresh releases. Its performance was primarily driven by its wide portfolio of digitally-delivered offerings, robust growth in its NBA 2K franchise, and the strong demand for Grand Theft Auto V.

Strong franchises to drive growth

Looking ahead, Take-Two should be able to sustain its impressive run on the back of a strong gaming line-up. The holiday line-up for the Xbox and PlayStation consoles includes basketball title NBA 2K15 and wrestling game WWE 2K15. NBA 2K14 was well received by its global audience the last time, becoming Take-Two's first sports release to exceed the 7 million unit sales mark.

The title has attracted gamers on both current and next-gen platforms, exceeding both FIFA and Madden, and becoming the third highest unit selling title of any genre on PlayStation 4 and Xbox One in the U.S. The NBA 2K franchise has expanded at a compound annual rate of 35% over its last 5 releases. This showcases the strong following of the franchise, and with the next version slated to go on sale later this year, Take-Two should receive another shot in the arm.

Looking ahead, Take-Two Interactive is leveraging its game developing abilities to create high-quality titles to draw new audience after their initial launch. Hence, it was not surprising that the company saw good traction at the E3 show in Los Angeles this year.

Take-Two showcased the first reveal of Rockstar Games' Grand Theft Auto V for PlayStation 4 and playable demos from 2K's unexpected lineup. The gaming booth of the company attracted several attendees each day, excited about playing the game. The titles won in total more than 100 editorial awards and honors, while Evolve grabbed over 50 awards, including the coveted Best of Show Award.

This is a clear indication of the fact that Take-Two's games are clicking with gamers. So, as new titles are launched, along with the launch of existing titles on new platforms, Take-Two's performance should improve. In addition, the development pipeline of Take-Two extends much beyond fiscal 2015. It has several titles planned for release during fiscal 2016, such as Battleborn, which is an entirely new intellectual property created for next-gen gamers.

Tapping the online market

Grand Theft Auto V is also going strong, despite being released in the 2013 holiday period. The title is attracting new audiences on Xbox 360 and PlayStation 3, and has sold more than 34 million units globally. Looking ahead, the game's release on the PlayStation 4, Xbox One, and PC platforms shortly will ignite further interest in the franchise.

Take-Two is also leveraging the popularity of the game in the online format. For example, Grand Theft Auto Online is surpassing the company's expectations, and was the primary driver behind its digitally delivered revenue. Take-Two has released several updates such as the highlight pack, Capture Creator, the limited time Independence Day Special, and I'm Not a Hipster pack to keep gamer interest alive in the game. Management is highly enthusiastic about the future of Grand Theft Auto Online, as its performance will be driven by its launch on the PlayStation 4, the Xbox One and the PC platforms.

Downloadable add-on content for Take-Two's marquee titles is also contributing robustly to recurrent consumer spending. For instance, its free-to-play online games are witnessing recurrent consumer spending in Asia. Particularly, NBA 2K Online, launched in partnership with Tencent (OTCPK:TCEHY) in China, is continuously delivering growth, revenue, and player engagement. The commercial launch of Civilization Online, its massively multiplayer online game based on the successful Sid Meier's Civilization franchise, is also expected to bring in revenue from the Chinese market.

Take-Two is making smart moves by tapping the online gaming market in China, as this is a huge market. Last year, the Chinese online gaming market was worth a whopping $13.5 billion. This year, the industry is expected to grow to $16.1 billion. Tencent is the leading game operator in China, so Take-Two has done the right thing by partnering with it to distribute its games.

Valuation

What really stands out about Take-Two, apart from its gaming pipeline, is its cheap valuation. The stock trades at just 7 times last year's earnings. In addition, it has a PEG ratio of just 0.80, which is another indication of its undervaluation. The profit margin of 16.63% is also satisfactory, while the current ratio of 4.33 signifies robustness of the company's balance sheet. Take-Two has a strong cash position of $841 million, which easily exceeds its debt of $459 million.

Finally, Take-Two's bottom line is estimated to grow at an annual rate of 26% for the next five years, better than the industry's average expected growth rate of 20%. Hence, there are indications that Take-Two Interactive can deliver more gains even after a strong run this year, making the stock a good long-term holding.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.