Take-Two Interactive Software Inc (NASDAQ:TTWO) has come into its own over the last two years. The company has achieved much higher growth rates than its larger rivals Activision Blizzard, Inc. (NASDAQ:ATVI) and Electronic Arts Inc. (NASDAQ:EA). Growth in TTWO stock has reflected this. Now, as Take-Two prepares for the release of Red Dead Redemption 2, the question of whether the high growth can continue weighs on investors’ minds.
Popular Franchises and Downloads Drive TTWO Stock
For years, TTWO has provided some of the games for the Xbox from Microsoft Corporation (NASDAQ:MSFT) and the PlayStation from Sony Corp (ADR) (NYSE:SNE). Lately, the company has shown leadership in downloadable games. Although this trend could lead to Gamestop Corp. (NYSE:GME) following in the footsteps of the now-defunct Blockbuster Entertainment, Inc., it has served as a more efficient delivery method for its products.
Although TTWO lags EA and ATVI in terms of revenue, its game franchises have put the company on the map. Its longest-running franchise, which has defined the company for years, is Grand Theft Auto. First introduced in 1997, it has gone on to release several popular versions, the last of which was in 2013. The latest update, Grand Theft Auto V, has sold over 85 million copies.
Although the Grand Theft Auto franchise has long served as the face of the company, in recent years, TTWO has launched other successful games, including Borderlands, Mafia, and Sid Meier’s Civilization. However, the Red Dead franchise is the one that’s expected to deliver in the near term. Red Dead Redemption has sold over 12.5 million copies since its release in 2010. Now, Red Dead Redemption 2 has an anticipated release early in 2018.
The question weighing on investors’ minds is if the new Red Dead game can further fuel the rally. The TTWO stock price has more than tripled in value over the last two years. Its price, at just over $110 per share, values the stock at nearly 90 times earnings. This greatly exceeds the 28 multiple in Electronic Arts and the 42 PE ratio of ATVI stock. However, neither EA nor ATVI has tripled in two years like TTWO stock.
TTWO Stock Is Most Exciting in Industry
TTWO has also been generating most of the excitement in the industry. Revenue at EA has only grown at a modest 3.2% per year over the last five years. ATVI has fared little better at about 6.8% in the same period. But TTWO stock has grown an average of 16.6%.
The high valuation of the stock is likely being driven by future reports on TTWO earnings. A consensus earnings per share (EPS) of $2.24 per share for fiscal 2018 may not justify its current stock price. However, for fiscal 2019, analysts expect earnings to rise to $4.17 per share. This comes as analyst expect a 45% increase in yearly revenue for fiscal 2019.
Despite the impressive numbers with TTWO, buyers should still exercise caution. With its high PE ratio, the stock has little room for error. Although Red Dead Redemption 2 will likely sell well, falling below expectations could have a devastating effect on Take-Two’s value.
Key to TTWO Stock Growth May Be in GTA
The immediate danger TTWO stock faces is a likely “buy the anticipation, sell the release” phenomenon. Hence, stockholders need a reason not to sell after Red Dead Redemption 2 reaches gaming consoles. The only known catalyst that could drive revenues higher after Redemption 2’s release would be TTWO news about an upcoming Grand Theft Auto VI release. Several reports have surfaced that the next Grand Theft Auto update has begun pre-production, but Take-Two has not commented on the speculation. However, the time lag between the release of IV and V amounts to almost 5.5 years. TTWO released Grand Theft Auto V in September 2013, just over four years ago. If the company holds to the same amount of time between releases, TTWO stock likely heads higher.
The main question for TTWO stock is whether its impressive growth can continue. The short answer remains probably not if all depends on Red Dead Redemption 2, and likely yes if a Grand Theft Auto VI will be forthcoming. TTWO has been outperforming ATVI and EA in growth over the last few years.
Its strong franchises and lead in game downloads have furthered its popularity. Most of the immediate focus has involved the Redemption 2 release. However, with long-term growth, owners of TTWO stock should likely be looking ahead to the hoped-for update for Grand Theft Auto. Assuming TTWO can maintain a technical lead and keep its popular franchises exciting, growth should continue for years to come.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.