No surprise here. Take Two Interactive Software Inc (NASDAQ:TTWO) stock is soaring after reporting blowout quarterly numbers and upping its full-year guide.
This is just more of the same for this secular growth stock. TTWO has developed a pattern of easily topping analyst estimates in its quarterly reports.
Meanwhile, TTWO stock has developed a pattern of shooting higher after earnings reports. There hasn’t been much inconsistency in this trend. That’s why TTWO stock is up about 300% over the past three years.
This uptrend isn’t over, either. I think there is easily another 30% upside to about $115 over the next two years. Here’s how TTWO stock will get there.
Take Two Has the Best Games
The bull thesis on TTWO stock all comes back to one thing: Take Two has the best and most diverse content portfolio in the entire gaming world. That is a solid foundation for investors to hang their hat on.
Between Rockstar games, which features the likes of Grand Theft Auto and Red Dead, and 2K games, which features the likes of the NBA, WWE and NHL series, Take Two’s content portfolio guarantees the company a promising, long-term growth narrative.
Why? Fans don’t bore of these titles. The first game in the Grand Theft Auto series released in 1997. Twenty years later, Grand Theft Auto V and Grand Theft Auto Online continue to outperform expectations. The whole Grand Theft Auto series is a huge driver of TTWO’s robust top-line growth.
On the 2K games side of things, the first NBA 2K game was released in 1999 (published by Sega). Eighteen years later, NBA 2K17 is Take Two’s highest-selling sports title ever with sell-in to-date of more than 8.5 million units.
In other words, Take Two is built on a robust, diverse content portfolio with enduring appeal. That means demand for TTWO product has always been there and will always be there.
Take Two Is a Money-Making Machine
Now, Take Two is figuring out to how maximize the amount of dollars it can squeeze out of that perennial demand.
The gaming industry, like retail, is going digital. The days of consumers going into a GameStop Corp. (NYSE:GME) and buying a game are numbered. Now, consumers just buy games at home and download them from the cloud.
Take Two is a big winner in this transition. This new era of digital gaming gives Take Two an infinite amount of cross-selling opportunities. Because games are now just downloaded from the cloud, Take Two can stick as much downloadable content in the cloud as it wants.
That means putting not only the full game in the cloud, but also add-on content like extra maps, new characters, and bonus levels. TTWO can also lock that add-on content behind a paywall and call it “bonus content” or “exclusives.”
That is exactly what TTWO is doing, and its working magnificently. Digitally-delivered revenue jumped 56% in the quarter to $268.2 million.
What specifically drove digital revenues so much higher?
Robust growth in recurrent consumer spending, which Take Two defines as money the company makes from virtual currency, downloadable add-on content and micro-transactions. These are all the new cross-selling opportunities TTWO has because of the digital shift.
Recurrent consumer spending rose 72% year-over-year last quarter. It now accounts for 41% of total net revenue.
Recurrent consumer spending continues to make up a bigger and bigger piece of the pie. That’s great, because recurrent consumer spending is the company’s bread-and-butter in today’s digital gaming world. So long as the content remains great (which it has for 20 years), growth will likewise remain robust.
Bottom Line on TTWO Stock
Fiscal 2019 is supposed to be a banner year for TTWO stock given some major headline releases. TTWO management is holding onto their guide for $2.5 billion in revenues and $700 million in operating cash flow in fiscal 2019. Considering Take Two has consistently outperformed internal expectations, that guide now seems conservative.
That gives me more confidence in my $116 price target. I actually now see $116 as the low-end of where TTWO stock will be in two years.
Here’s the back-of-the-envelope math behind that price target. About $700 million in operating cash flow in fiscal 2019 translates to about $5.80 in cash flow per share.
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 more than 30% upside over the next two years, and I see that as a conservative call.
As of this writing, Luke Lango was long TTWO and GME stock.
