Take-Two: Risky Play

About: Take-Two Interactive Software, Inc. (TTWO)
by: Mauro Solis

Take-Two has many games under development that could push them to the top of the estimates.

Dividends might completely change the valuation.

If neither of those things happens, it is probably not going to be a homerun.

Take-Two Interactive Software (TTWO) is expected to deliver acceptable revenue growth next year, and the market estimates will be growing high in the following years.

Investing in the company presents a tricky risk-reward proposition with minor downside and high upside potential, and as for its price, it is slightly overvalued.

Take-Two is a large-cap company with a market cap of about $14 Billion with compelling financials. One of the most exciting assets of the company is the Private Division which will publish its first significant game this month (Ancestors: The Humankind Odyssey). The game will be an indicator of how successful the Private Division will be, and consequently, how high are the chances that the stock can deliver a home run.

The Next Classics

Previously, I expressed my enthusiasm for the pipeline of products that Take-Two has lined up. The first of which was Red Dead Redemption 2.

Looking ahead, Take-Two has the strongest development pipeline in its history, including sequels from our biggest franchises as well as exciting new IP. We are exceedingly well positioned to capitalize on the positive trends in our industry, and to generate significant growth and margin expansion over the long-term. Take-Two 2020 Q1 Press Release

The Private Division has only impacted the company results negatively for now, but this will change soon when Ancestors: The Humankind Odyssey is published. The game is set to be released this month and looks remarkably attractive.

The video above shows the gist of the game, which for me seems fantastic. The results of this game will not only show if Panache Digital Games is a good developer. It will show a glance of the capabilities that Private Division has and might be a preview of what we can hope for Take-Two in the next few years.

Source: Meristation

Later this year (On October 25th), Private Division will release The Outer Worlds, and Disintegration will come in 2021. Project Wight was renamed Darkborn, and it is still a mystery when it will be published.

We expect the net bookings breakdown from our labels to be roughly 60% to 2K, 30% Rockstar Games and 10% Private Division and Social Point and other. " Lainie Goldstein - CFO Q1 Call

Private Division is accounting for a tiny piece of the revenue forecast of the company. If the games of the Private Division become a success, the company can likely beat all the earnings expectations.

The gaming world is changing rapidly, and there are many risks, including how will Stadia Change the market, and how will the development costs change. But Take-Two is on the right track, and Ancestors should confirm it.

Game developing is more art than science, so there is an inherent risk on the company's plan. Even so, Private Division was an outstanding move from management that prioritizes long-term benefits and soon will be the time to reap rewards.


Projecting that revenue growth is between 6.6% and 13.3% while maintaining a gross margin in the range of 53.9% to 54.7%. Considering that the company will keep spending in R&D between 7% and 7.4% of its revenue and estimating that G&A as a percentage of revenue will be between 25.2% and 25.5%, we have the following chart.

Source: Author's Charts

These approximations are in line with the market expectations for Take-Two in the next couple of years, as the image below shows.

Source: Seeking Alpha

I like to use Peter Lynch's ratio when valuing a stock. This method uses the ratio between the expected earnings growth plus dividends and the P/E of the stock to determine its fair value. A stock that has a 1:1 ratio is reasonably priced. The higher the number, the more underpriced the stock is.

Source: Author's Charts

This valuation takes into account the assets and liabilities of the company and the expected change in equity the company will have in the future. The growth considered in the valuation is the average yearly growth of the next years.

With this valuation, arguably, the stock is at worst overvalued by 39% and at best overvalued by 8%. So, the stock is overvalued.

Source: Author's Charts

Constructing an adjusted Beta Pert risk profile for the long-term prospects of the stock, we can calculate the risk profile for the company.

Source: Author's Charts

The risk profile shows there is a 39.57% probability that Take-Two will trade at a lower price than it is today. The upside could be up to 14.26% yearly return.

The risk profile shows there is a 39.57% probability that Take-Two will ever trade at a lower price than it is today. Considering the potential downside, upside, and the likelihood of each, the statistical value of the opportunity of investing now is 1.4%.

A result of 1.4% is quite low. However, the potential upside is significant. The issue is that, while the company could have a considerable growth spurt soon, the revenue and earnings growth flattens after that.

However, strong financials with little room to grow might enable the company to offer dividends. Dividends would significantly reduce the downside of investing in the company and increase the price target.

Source: Author's Charts

Admittedly, dividends are not in the immediate plans of the company and could be at least two years away; it seems a logical way to go for management.


The upcoming roster of games could deliver a significant result for the stock and move the price considerably. Even if this doesn't happen, the core business of Take-Two is sturdy, making the downside risk very small (especially for those of us who bought below $100).

Stockholders who believe in the company's roadmap might do well to hold the stock. Take-Two is a great way to get into the gaming market, but there is little intrinsic value in the current price and the future of the stock considering its risks. Being long the company implies believing that the company's edge will come from its deep partnership and bet on the Private Division.

Now is not the best time to get the stock. However, if Ancestors lives up to the hype, the price will likely not reflect it immediately, creating an interesting window for new investors to get the stock before the results are evident in the Q2 results.

If there is anything in this article you agree or disagree with or would like me to expand further on, I would sincerely appreciate you leaving a comment. I will address it as soon as possible.

Disclosure: I am/we are long TTWO. 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.