Buy Take Two Interactive Software Inc (TTWO) Stock Now & Hold For 2 Years

Advertisement

Shares of Take Two Interactive Software Inc (NASDAQ:TTWO) are heading markedly higher today after the company reported better-than-expected fourth-quarter results. Interestingly, today’s 5%-plus pop followed a 10% drop in post-market trading yesterday after TTWO announced it would be delaying the launch of Red Dead Redemption 2 by about six months.

TTWO Stock: Buy Take Two Interactive Software Inc (TTWO) Stock Now & Hold For 2 Years

Source: Via Rockstar

That is some volatile trading.

But it underscores a very bullish sentiment from TTWO’s investor base. The good news outweighs the bad news.

And that’s nothing new. The stock has done almost nothing but head higher over the past five years. TTWO stock traded below $10 in 2012. Now, TTWO stock trades just north of $72.

I think that uptrend continues. Here’s why.

TTWO’s Secular Growth Story

When it comes to gaming, Take-Two may have the best content portfolio in the business. The portfolio is broken down into two components: Rockstar Games and 2K. On the Rockstar Games front, TTWO features headline names like Grand Theft Auto and Red Dead, both of which have had extremely successful runs. On the 2K front, TTWO has the NBA series, the WWE series, the NHL series, the Civilization series, the Bioshock series, and the Borderlands series, among a handful of other big names.

All in all, TTWO has a very strong content portfolio that is both deep and wide in terms of audience interest. That positions the company well for long-term growth.

TTWO is also benefiting from the secular shift in the gaming industry to downloadable content. Digital revenue grew more than 40% in Q4. Downloadable content add-ons, which is a way for TTWO to squeeze more money out of each of its customers, is growing in sync with digital revenue. All together, DLC content accounts for about half of digital revenue.

The strong digital growth engine is fueling very strong topline growth. Revenues grew 26% this year, and are expected to reach $2.5 billion in two years. That is nearly 20% compounded revenue growth over the next two years. We don’t see any risk to that forecast, considering the strength of the content portfolio and that this management team has had no problem reaching its targets in the past.

The new era of virtual reality gaming also provides a compelling growth opportunity for content creators like TTWO stock.

Flowing through the income statement, margins are also expanding. That means earnings and cash flows are booming. Take Two generated operating cash flow of $331.4 million this year. That is expected to balloon to $700 million in two years. That is 45% compounded growth over the next two years. It is also worth noting that TTWO stock has an exceptionally low capex rate, so a big portion of those cash flows will also be free cash flow.

Bottom Line on TTWO Stock

Take Two has been a big winner for many years now, and with good reason. The company has the best content portfolio in the gaming industry. The overall gaming growth story is gaining momentum as huge changes come to the industry with downloadable content and VR/AR enhancement. TTWO is set to benefit hugely.

If the company can get to $700 million in operating cash flow in two years, that would be about $5.80 per share assuming 120 million diluted shares. A high-growth, big-moat company like Take Two easily deserves a 20-times multiple on that cash EPS. That gets you to a $116 stock in two years.

That is about 60% upside over the next two years for TTWO stock. I think that is exactly what will happen.

Bottom line: TTWO is a buy-and-hold stock.

As of this writing, Luke Lango was long TTWO.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/take-two-interactive-sotware-inc-ttwo-stock-hold/.

©2024 InvestorPlace Media, LLC