Take-Two Is On Track To Have Another Record Year

About: Take-Two Interactive Software, Inc. (TTWO)
by: Bohdan Kucheriavyi

Red Dead Online had a weak launch and at the current stage it generates less revenue than GTA Online.

Nevertheless, I believe that Take-Two has a high probability of achieving its FY19 goals.

Take-Two’s full lineup of products for FY20 is expected to be announced in May.

It saddens me to say this, but as a person who spent hundreds of hours playing almost every game from Take-Two’s (NASDAQ:TTWO) portfolio since the age of 9, I must admit that the company’s recent multiplayer project Red Dead Online is a dead man walking. While I consider Red Dead Redemption 2 to be one of the greatest titles of this decade, its online mode fails to keep players engaged with the gaming world and after a few hours of play there’s nothing to do. Nevertheless, I do think that Take-Two has a high probability of achieving its goals for the current fiscal year, considering that the publisher was able to sell more than 23 million copies of Red Dead Redemption 2 in Q3. The company is also liquid enough to stay afloat for a long period of time and its current lineup of titles, short as it may be, continues to generate record revenues to Take-Two.

Source: Take-Two

Here’s my quick view on the company:

Red Dead Online

After the initial success of GTA Online, which was released back in 2013, Take-Two and the game’s developer Rockstar Games decided to commit more time and resources to expand the title’s universe and were constantly releasing new multiplayer content updates that kept the players engaged. In order to make money from the title, Take-Two used an in-game currency that is purchased with real-world funds and is used to acquire premium in-game content. As a result, in the last five years Rockstar Games didn’t release any new title, but thanks to its efforts, GTA Online became the most financially successful media title of all time that continues to make profits to this day. However, not everything could last forever. As the competitive landscape becomes fiercer and the company’s FY18 results were almost in line with FY17 results, it was necessary for Take-Two to release new AAA title that would give a breath of fresh air to the publisher and be able to create additional shareholder value along the way.

When Red Dead Redemption 2 came out last October, the whole industry was excited. In less than two weeks, the publisher managed to sell 17 million copies of the game and by the end of December, that number was 23 million. The successful launch of the title massively increased the company’s guidance and as a result, Take-Two expects to make around $2.7 billion in revenues in FY19 (as shown in the picture above).

However, when it comes to Red Dead Online, which is a multiplayer mode for Red Dead Redemption 2, there are a lot of things that are needed to be discussed. A number of outlets already point out to the fact that Red Dead Online at this stage generates less revenue than GTA Online.

The number of monthly active users for Red Dead Online is already declining and after playing the game for two weeks, I believe that there are a few major reasons for it. First of all, Red Dead Online is a western action-adventure title, where gunslingers and outlaws rule the gaming universe. The reality is that western theme doesn’t suit everyone and Take-Two will not be able to add private jets or yachts like it did in GTA Online to attract a broader audience. In addition, the game at this stage is too boring. After a couple hours of play, everything seems to be repetitive and when you finish the main storyline, which is too short right now, there’s nothing else to do in the game.

While it’s true that the online component is in beta stage, it’s highly unlikely that the publisher will be able to regain its fans over time, as the overall industry is filled with multiplayer products that are more popular than Red Dead Online and are continuously supported by developers on a weekly basis. That’s why I believe that Red Dead Online is a dead man walking, even though the single-player campaign is one of the best that I have ever played in a long time and 23 million copies that have been sold prove my point. However, the post-release content so far has been weak and I think that it’s going to hurt the company’s FY20 expectations.

What’s Next?

Last month, Gearbox Software, one of Take-Two’s developers, announced the upcoming release of an action role-playing shooter Borderlands 3. Borderlands itself is a triple-A franchise and the previous titles from the series were sold more than 41 million times. It’s true that Borderlands is not as popular as Red Dead Redemption or even GTA, but it doesn’t need to have a huge fan base in order to bring GTA 5 returns, because it can co-exist with other titles.

However, due to the disappointing launch of Red Dead Online, I believe that Take-Two might announce a conservative guidance for FY20 that could be below the FY19 results. One thing the company could do to improve the guidance for the upcoming fiscal year is to release story mode DLC for Red Dead Redemption 2, like it did back in 2009, when it released Episodes of Liberty City DLC for GTA IV or Undead Nightmare that was a standalone expansion for the original Red Dead Redemption and was sold more than 2 million times. I also believe that the main reason why GTA 5 didn’t have a major content update was due to the fact that GTA Online was too successful and providing an additional in-game content for the single-player campaign required too much time and effort and the monetary reward was not worth the risk of developing it in the first place. Since there is news of Red Dead Online poor performance, I think that the publisher should once again consider an option of creating an additional single-player DLC for Red Dead Redemption 2.

While releasing GTA 6 is a no-brainer, those of you who are familiar with Rockstar Games know that the studio takes a long time to release any of its triple-A titles. I think that it’s ridiculous to say that the game will be released next year or in 2021. Take-Two has long ago became known as a quality over quantity publisher that likes to keep its titles under development for as long as possible in order to deliver the best gaming experience for the players. As a result, in the last 10 years the compounded annual growth rate of its stock was around 27% thanks to this strategy, while S&P 500 ETFs had CAGR of around 14%. However, even the announcement of GTA 6 could create a long-lasting stock momentum until the game’s release, considering that its predecessor continues to make money for the publisher nearly six years after its release in 2013.

When we look at the company’s balance sheet, we will see that Take-Two has been able to generate enough cash and cash equivalents to stay afloat for a long period of time. The publisher has no debt and its operating and net margins are 8.99% and 14.26%, respectively. Take-Two’s stock also has a P/E of ~30x, which is close to the industry’s median and average and the company expects to generate $545 million from operating activities in FY19.

Source: Take-Two


Considering all of this, I believe that Take-Two is in a good financial shape and it has a high probability of achieving its FY19 goals. At the same time, the publisher might announce a conservative guidance for FY20 that might be below FY19 results due to the fact that Red Dead Online had a disappointing launch. However, the company will present the full lineup of titles and new DLCs later in May and maybe we will see the announcement of some high-quality content that will be able to generate more profits and improve the overall guidance.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.