Activision shares are off nearly 50% from their September peak, while Take-Two stock is down about 35% during the same time period. Electronic Arts (NASDAQ:EA) has lost nearly a third of its value even after rebounding strongly from December’s lows.
And to be fair, much of the stocks’ plunge was deserved. Most of these names were overextended by the middle of last year, and investors were shocked to see just how easily the free online game Fortnite came out of nowhere and was so disruptive to the status quo.
Everything about the video-game market is fluid, though, including its stocks. This dip, however, is an opportunity to step into the smallest but arguably the best-of-breed in the business… Take-Two stock.
TTWO Wins the Console Loyalty Wars
Take-Two is the name behind hits like Red Dead Redemption and the Grand Theft Auto series. Although its Grand Theft Auto franchise is the most successful video-game series ever in terms of revenue, TTWO has developed many fewer games than rivals like EA and Activision.
TTWO also produces distinctly different kinds of game that may be counterintuitive on the surface. However, they are great money makers.
Contrary to popular belief, gaming consoles like Microsoft’s (NASDAQ:MSFT) Xbox and PlayStation from Sony (NYSE:SNE) are still a big deal. Although it is true that PC gaming is growing, console-play is also still growing, and its rising tide is lifting all boats.
The industry’s response to the expansion of the PC-games market has largely been to attempt to be all things to all people. EA now offers subscription-based access to PC-only games via its Origin Access program, while Microsoft now enables subscribers to its Game Pass service to access PC-based games.
TTWO has tiptoed down the same path too, although not as much as its competitors. Over the course of the past three quarters, 85% of its revenue came from console players.
It’s a detail some investors find interesting, if not outright concerning. There’s a method to Take-Two’s madness, though.
Rather than spreading its wings too far, the company has thus far focused on what it knows it does best: making great console games.
A PC version of Grand Theft Auto V was eventually released, but it wasn’t a priority. Meanwhile, although there are rumors that a PC version of Red Dead Redemption 2 will be released, it also doesn’t appear to be a priority for the company.
The strategy is effective and positive for Take-Two stock, even if it ultimately limits the company’s top line.
Staying in the Good Graces of Gamers
Most investors who aren’t avid video-game players may not realize it, but regular players will readily recognize another not-so-subtle shift in the gaming business: the advent of in-game purchases called microtransactions. The latter phenomenon has grown from being a fun and easy way to enhance game-play for a couple bucks to a full-blown profit center in and of itself.
The matter reached a fever-pitched frenzy in late-2017, after EA launched a new game. Gamers quickly learned the hard way that to be able to use some of the coolest weaponry or play as some of the coolest characters required either a massive amount of playing time or $80. That’s more than buying the game cost.
In-game purchases haven’t gone away since then. Although most game developers have pushed them less aggressively recently, they’re still a problem. The industry hasn’t yet seemed to figure out what’s fair when it comes to in-game purchases and where gamers draw the line.
Take-Two has exercised considerably more restraint than its rivals have, however. Through the first nine months of the recently-ended fiscal year, only about one-third of the company’s revenue came from what TTWO described as “recurrent consumer spending.” The other two-thirds was driven by selling games.
For perspective, a year ago Activision Blizzard reported that it had taken in more money from microtransactions than it did from actually selling video games.
Many players claim they don’t like the new normal, and some vowed to boycott EA in response to what they saw as its overly aggressive microtransaction tactics. But most complainers never follow through on their promises.
On the flip side, it’s also quite likely that many gamers haven’t complained — vocally — at all, yet gravitate toward games like Take-Two’s that don’t cost quite so much to make the most of and are seen as a much better value. If that’s the case, it’s certainly a positive attribute for Take-Two and Take-Two stock
TTWO CEO Strauss Zelnick has made a point of advancing the microtransaction minimization strategy explaining last year “Are you a monetization company or are you an entertainment company? We’re an entertainment company and when we get that right, everything else flows from it.”
The Bottom Line on Take-Two Stock
While TTWO has worked its way into the upper echelon of game-publishing outfits by being the least typical company in the business, it’s not bulletproof. It suffers the same cyclical swings that its rivals and console technologies do. The recent selloff of Take-Two stock illustrates that point.
Nevertheless, Take-Two seems to fare better against headwinds than its rivals, and Take-Two stock bounces back better than the shares of its rivals do when disruptions like Fortnite come down the pike.
Not every investor has to own Take-Two stock. But for investors who have to own a video-gaming name, Take-Two stock is an easy name to buy and just let simmer. It’s even easier to buy TTWO stock on a dip like the one it just experienced.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.