Take-Two Interactive Software Inc Stock Is Still a Buy. Here’s Why

When it comes to TTWO stock, the long-term fundamentals remain strong

By Luke Lango, InvestorPlace Contributor

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Take-Two Interactive Software Inc (NASDAQ:TTWO) stock is down after reporting mixed holiday numbers amid a broader market sell-off. While buying the dip in this market is a difficult thing to do, I think TTWO stock does offer a compelling value prop at current levels.

The quarter itself was actually pretty good. Bears are quick to point out the quarter’s revenue miss, but a revenue miss in a quarter that didn’t have any headline releases isn’t all that worrisome. Plus, investors aren’t buying TTWO stock for holiday quarter 2017 results.

They are buying for what is supposed to be a super charged 2019, headlined by the launch of Red Dead Redemption 2.

Broadly speaking, I think this sell-off should be bought. Markets are choppy right now, and if rates keep creeping higher, then stocks will struggle. That makes buying dips hard.

But TTWO stock is the type you want to own during this environment. Here’s why.

The Reasons To Buy Take Two Stock

Firstly, the valuation on Take Two stock isn’t that rich when put next to its growth prospects.

You’re looking at a stock that is trading at just 21.6-times forward earnings for what analysts see as 30% long-term earnings growth. That is pretty cheap. A 21.6 forward multiple on 30% growth estimates is a price-to-earnings/growth (PEG) ratio of just 0.7. The S&P 500 is at a 1.3 PEG ratio, so the broad market is much more expensive.

Granted, bears will astutely point out that a majority of that 30% growth is driven by a huge 2019 jump. Earnings are actually expected to drop slightly after 2019. But earnings and cash flows will remain strong.

Given TTWO’s robust content portfolio and the tailwinds in the video game world, we think it is likely that cash flow runs around $700 million in 2019, and grows mildly from that base thereafter.

Throw a five-year average price-to-cash flow multiple of 23 on that $700 million, and you get to a market cap of over $16 billion by the end of 2019 (versus current market cap of $12.3 billion). That implies roughly 15% return per year for TTWO stock over the next two years.

Secondly, demand for TTWO content is not only strong, but durable as well. This is illustrated by multiple titles setting records several years after their initial launch. The NBA 2K franchise just launched its best game ever. That franchise is nearly 20 years old. Meanwhile, GTA Online V was the number 3 video game title this year, and it launched four years ago.

Clearly, consumer demand does not wane for TTWO video games. Higher rates won’t change this. In fact, higher rates mean higher wages, which could translate into higher demand.

Thirdly, Take Two has a bunch of cash on its balance sheet that it can weaponize at any point to supercharge growth via acquisitions. The company is already pioneering its Private Division, which is focused on bringing titles from top independent developers to market. In other words, TTWO’s content portfolio is only widening.

Fourthly, this whole growth narrative is heading towards a supercharged 2019. Headlined by the launch of Red Dead Redemption 2, TTWO believes 2019 will be a record year across all important metrics. A mixed holiday quarter doesn’t affect that long-term growth outlook at all.

Lastly, Take Two is just a really good company, and TTWO stock is a really good stock. The company has the most robust, in-demand video game content portfolio in the world. That is the case now, has been the case for several years, and will remain the case into the foreseeable future.

So long as TTWO claims the best content portfolio in the world, TTWO stock will head higher in the long-term (regardless of near-term noise).

Bottom Line on TTWO Stock

It is tough to buy in the all-the-sudden highly volatile market. But there are opportunities out there. I think Take Two stock is one of those opportunities. This is a really strong growth stock supported by really strong fundamentals. Regardless of near term noise, this stock should head higher in the long term.

As of this writing, Luke Lango was long TTWO. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/ttwo-stock-still-buy/.

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