Buy Take-Two Interactive Software: The Rich Are About To Get Richer

Summary

• TTWO is in a prime spot for getting in on one of the best performing industries in the market.
• Fundamentals are strong and company is at a greater discount compared to peer group.
• Delay of sequel to the hit title Red Dead Redemption could be a blessing in disguise for both investor and consumer.
• Technical level indicates a great opportunity with very limited risk.

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Take-Two Interactive Software Inc. (NASDAQ:TTWO) is one of the largest developers of video game entertainment in the world. They own two of the larger developer studios by the names of 2K Games (developer of sports titles WWE 2K** and NBA 2K**) and Rockstar Games (developer of hit title Grand Theft Auto V). Grand Theft Auto V, as of February 2018, has sold more the 90 million copies making it the third best-selling game in history behind only Minecraft and Tetris. Take-Two has performed well within a very competitive peer group and forecasts show that it's here to stay.

The video game industry performed very well in 2017 with all three major players (Take-Two Interactive Software, Activision Blizzard (ATVI), and Electronic Arts (EA)) all outperforming the S&P 500 (18%) with gains of 122%, 74% and 32%, respectively. All three video game giants have also beaten the market leading tech sector returns that are highlighted below.

(Source: Standard and Poor's)

With Take-Two being smaller in market cap compared to its peers, $12.24B compared to $38.65B for EA and $53.07B for ATVI, the company has stood its ground as the leading gainer of the group for 2017, and with a 5-year projected PEG Ratio of 1.10, the upside potential is still great as it continues to grow at a greater pace compared to competition. In addition, the current trailing P/E may seem high at 65.67, but with a forward P/E of 21.15 and considering the 122% increase in stock price over the last year, the company is still relatively cheap.

Although the most recent earnings report showed a miss in estimated revenue, it still posted a small increase of .01% from the same quarter a year ago, as well as a 46.5% EPS growth for that same period. This comes with the lack of any major title releases during that time.

One noticeable show of strength comes with Morgan Stanley recently downgrading Electronic Arts from 'overweight' to 'equal-weight' and issuing a $120 downward revised price target from $126. While a month later, the firm initiated coverage on TTWO with a $150 price target. Although this target is on the higher end than most, the company still maintains an average price target of $131.15 amongst the 20 analysts currently covering the company. With the current price as of this article being $107.04, it is at a serious discount.

On February 1st, TTWO's share price quickly tumbled from $129 to $120 in the first 15 minutes after the company announced that the highly anticipated release of Red Dead Redemption 2 would be delayed to October 26, 2018 after an initial projected release was some time in Q2 of 2018. I believe this was an overreaction by the market. Consumers of Take-Two titles have become accustomed to the delays and usually welcome them after seeing the success of past titles. Take-Two Interactive loves adding little details to their games and are very articulate when it comes to making sure they release the best product possible. As we can see with the success of Grand Theft Auto V, this has worked well for them.

(Source: Guinness Book of World Records)

For those who are unaware of the popularity of the Red Dead Redemption series, which was first released back in May of 2010 for Xbox 360, we can take a look at the sales increase once the title was announced to be backwards compatible on the Xbox One in 2016, six years later.

(Source: Amazon.com)

A 6,000% increase in sales on a 6-year-old game. Red Dead Redemption 2 is showing no signs pointing towards a lack of enthusiasm either. As the article referenced earlier showed, Morgan Stanley stated that an early survey suggests TTWO is estimated to sell around 23 million units during its release. Because of this demand, as well as the strength and popularity of the already released NBA 2K18 and Grand Theft Auto V, analysts have remained very optimistic about the future of Take-Two Interactive. This is shown by the 64% increase in average EPS estimates for 2019 with analysts continuing to revise estimates upward.

(Source: Morningstar)

The technicals for the company are not bad either. For most of 2017, the price was overly extended off the moving averages which kept some investors at a distance. But with the overreaction on the news of the Red Dead Redemption delay followed by the market correction during early February, the price has fallen but remains above the 200-day moving average as well as other key support. This should provide entry with little risk and high potential payouts for those who have been wanting to get in on one of the hottest stocks in the industry.

(Source: TC2000 Charting Software)

Take-Two Interactive has proven time and time again through the continued success of the Grand Theft Auto series, the previous Red Dead Redemption title, as well as many others, that they know how to deliver exactly what consumers want from their products. The delay of Red Dead Redemption 2 may have hurt the stock price in the short term, but the company has proven that the extra time they now have will be put to good use and they will be able to further polish the final game before release day. I have a target of $140 for TTWO. Despite the market's overreaction to the delay of RDR2 and almost immediately followed by the effect of the market correction, the company has shown no reason for a price decline. Even though revenues missed estimates in the most recent quarter, they still posted, albeit a small one, an increase in YoY revenue from the same quarter a year ago and an almost 50% increase in earnings. It's been a long time since consumers were disappointed with a big name release by Take-Two and I don't expect that to change with their upcoming release.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TTWO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.