Video game stocks have been outperforming the market in 2020, on the idea that as the novel coronavirus has kept consumers stuck in homes, they’ve been playing and spending money on video games at a feverish pace. Video game publisher Take-Two Interactive (NASDAQ:TTWO) has been no exception to this trend. Year-to-date, TTWO stock is up almost 2%.
This strength in Take-Two will persist for the rest of the year, and for years to come.
In fact, video game stocks look positioned to deliver big gains over the next three to five years. In that category, TTWO stock looks like the best stock to buy.
Here’s five reasons why you should buy TTWO stock now:
- Thanks to technological breakthroughs and societal changes, the video game industry is set to undergo explosive growth over the next three to five years.
- Take-Two is the Disney (NYSE:DIS) of the video game world. It has the industry’s deepest and highest-quality content portfolio.
- Take-Two’s online services are second-to-none, and there will be tremendous growth in online gaming over the next several years.
- There are multiple big catalysts on the horizon for Take-Two, including the expansion of NBA 2K League and the launch of Grand Theft Auto 6 in the early 2020s.
- Relative to the company’s long-term profit growth potential, TTWO stock is significantly undervalued. Upside to $200-plus prices is likely within a few years.
Big Video Game Growth Will Boost TTWO Stock
The video game industry will enter a growth renaissance of sorts in 2020, and that renaissance will last several years.
It will all start with two things. First, the widespread proliferation of 5G connectivity in mid-to-late 2020 will rapidly improve gaming, by improving graphics and speed, and decreasing latency and lag.
Second, the launch of two new-generation consoles, the Xbox Series X and PlayStation 5, will spark big gaming demand growth during the 2020 holiday season.
Thereafter, multiple technological improvements — such as the introduction of cloud gaming, artificial and virtual reality gaming, and eSports — will sustain huge gaming demand growth in the early 2020s. So will a subtle societal shift towards “digi-social” interactions, where consumers increasingly interact with each other through online portals.
All in all, the video game industry will likely sustain double-digit revenue growth over the next few years. During this period of robust growth, video game stocks will charge higher.
Best Content Portfolio
In the media world, you have Disney, a company with the best movie content in the world. Don’t forget Disney owns Marvel, Pixar and Star Wars.
In the video game world, Take-Two is Disney. Take-Two owns the best video game content in the world.
Take-Two owns Grand Theft Auto, which is the best-selling console game of all time. The company also owns NBA 2K and Civilization. Those are the best-selling titles among sports and strategy video games. Red Dead Redemption and Borderlands, also Take-Two properties, are among some of the best-selling shooter games in recent memory.
In other words, Take-Two’s video games aren’t just in every video game category out there — they are often the top games in each one of those categories.
Ultimately, this unparalleled content portfolio positions Take-Two for enormous success in the video game boom of the early 2020s.
Strong Online Services
Take-Two’s video games are more than just super popular. They also have great online services, and that’s big for Take-Two because it allows the company to consistently and regularly monetize its fan base with high-margin software sales, like micro-transactions and upgrade packages.
Consider GTA Online. It’s arguably the most popular online video game platform out there today. And it’s growing very rapidly. Recurrent consumer spending on GTA Online rose 54% last quarter.
Or consider Red Dead Online. Next to GTA, it’s also one of the more popular and widely played video game platforms out there. Because it’s newer than GT Online, Red Dead Online is growing more quickly, with net bookings tripling year-over-year last quarter.
Or consider NBA 2K Online. It’s the number one PC online sports game in China, with more than 48 million registered users.
All in all, Take-Two has a robust portfolio of online services to accompany its robust portfolio of games. These online services will continue to grow over the next three to five years, and enable the company to grow its high-margin recurrent consumer spending business at a healthy pace.
Take-Two’s 2 Big Catalysts
Over the next few years, two big catalysts will emerge which could spark better-than-expected growth at Take-Two.
First, the company’s NBA 2K League could turn into something very big. Global eSports viewership is expected to rise by more than 40% in 2022, while revenues are expected to rise by more than 60% over that same stretch. Amid this eSports explosion, NBA 2K League is well-positioned to turn into one of the most watched eSports leagues in the world, owing to the fact the consumers actually like to watch people play NBA 2K.
If you don’t believe me, just consider that ESPN’s recent NBA 2K Players Tournament was such a huge success that the NBA is considering doing it again … even after the pandemic fades and live sports return.
From this lens, I see the NBA 2K League turning into something very, very big by 2021 or 2022.
Around the same time, Take-Two should launch the highly anticipated Grand Theft Auto 6. This one needs very little explanation. GTA is the best-selling console video game of all time. Demand for GTA content is only rising. A new GTA game in 2021 or 2022 could big a huge hit for Take-Two.
TTWO Stock Can Surpass $200
My modeling suggests that Take-Two has enough long-term profit growth potential to support TTWO stock above $200 within the next few years.
The math is simple. Take-Two, owing to its robust content portfolio, strong live services and huge GTA 6 and NBA 2K League catalysts, should sustain 10%-plus compounded annual revenue growth over the next few years. At the same time, the shift toward heavier recurrent consumer spending and software sales should provide a meaningful boost to gross margins.
This coupling of 10%-plus revenue growth and gross margin expansion should drive somewhere north of 15% annualized profit growth. Assuming so, Take-Two should be able to net about $10 in earnings per share by 2025.
Based on a 23-times forward earnings multiple — which is about average for video game stocks — that implies a 2024 price target for TTWO stock of $230.
Bottom Line on TTWO Stock
Take-Two is the best stock to buy in a video game industry that is ready to roar higher over the next few years. As such, while TTWO stock may be noisy here and now amid the coronavirus pandemic, I think the best multi-year investment strategy here is simple.
Ignore the noise. Buy dips in TTWO stock. Hold for the next few years. Prices above $200 are likely.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
