Take Two Interactive Software Inc (NASDAQ:TTWO) has long been my favorite play in the video game sector. I’ve been a fan of the gaming stocks for a while, thanks to burgeoning cross-selling opportunities from micro-transactions as well as growth potential through eSports and virtual/augmented reality. And although Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI) have been on my radar, TTWO stock beats them both, thanks to the company’s unparalleled content portfolio.
Going into February 2018 and ahead of the holiday earnings reports from most of these video game publishers, I’m more bullish on the group than ever.
Why?
Because by most data points, video game publishers had a record holiday season. Strong numbers from the most important time of the year for the sector should translate into healthy rallies.
Moreover, I’m still most bullish on TTWO stock. Take Two remains the most attractively valued name in the group. The momentum in the name is strong, and it’s all building towards what will be a record 2019. Plus, it looks like micro-transactions fueled a huge holiday quarter even without any new headline releases from Grand Theft Auto.
As such, I’m doubling down on TTWO stock here. This stock will report strong numbers. The uptrend will remain in-tact. Overall, things continue to look good into 2019.
Record Holiday Quarter
The overall read from multiple data points is that video game sales surged this holiday season. While ATVI was the biggest winner thanks to a strong Call of Duty showing, TTWO was arguably the second biggest winner.
According to data from NPD, video game software sales just had their first up December in several years. Buoyed by robust consumer spending during the holidays and new console enthusiasm (thank you, Switch), console software sales rose 2% in December. That compares favorably to declines in December 2016 and December 2015.
The best-selling video game during the upbeat December month was Activision’s Call of Duty: WWII. But Take-Two’s NBA 2K18 was the fourth best-selling game, up from number 5 last December.
Grand Theft Auto V was the tenth best-selling video game, down from number 7 last year, but overall console software sales were down 12% in 2016. They were up 2% in 2017. In other words, lost market share from GTA V should be offset by overall market growth.
Moreover, it wasn’t about new console sales for GTA this holiday season.
In December, TTWO reported that GTA Online had a record number of players in December thanks to a new update which added a three-act story to the game. More players than ever playing GTA Online means more revenue than ever flowing through Take Two thanks to micro-transactions.
Overall, the GTA series actually put up solid holiday numbers despite not having a blockbuster new release.
That is pretty amazing.
And it underscores just how much consumers love TTWO content.
Attractive Valuation
The best part about TTWO stock is that the valuation remains exceptionally attractive relative to ATVI and EA.
Both EA and ATVI have similar valuation profiles. Both are projected to grow earnings around 15% per year over the next several years, while both are trading at 28-times this year’s earnings. That gives each stock a PEG (price-to-earnings/growth) ratio of ~1.9.
But TTWO is trading at 39-times this year’s earnings for what is seen as 30% earnings growth per year over the next several years. That gives TTWO stock a much more attractive PEG ratio of 1.3.
Ironically, that is the same PEG ratio as the S&P 500. Considering TTWO stock features the same PEG ratio as the S&P 500 but has much bigger growth potential (30% versus 14% for S&P 500), I feel very comfortable with the current valuation on TTWO. There is definitely room for further expansion.
Bottom Line on TTWO Stock
This a buy-now, hold-into-2019 type of stock. The valuation is attractive, the growth story is strengthening, and the company’s robust and popular content portfolio allows for multiple incremental revenue opportunities.
Moreover, the whole growth narrative is building into 2019, when TTWO is expected to launch some big 2K games and Red Dead Redemption 2 (which will also have an online version like GTA).
With the growth narrative strengthening into a banner 2019, this a stock you want to own here and now.
As of this writing, Luke Lango was long TTWO, ATVI, and EA.
