Does Take-Two Interactive Stock Have Room For Growth?

TTWO: Take-Two Interactive Software logo
Take-Two Interactive Software

Despite a 32% rise in Take-Two Interactive stock (NASDAQ: TTWO) this year, outperforming the broader S&P500 index, which is up 12%, we believe it has more room for growth. However, looking at a slightly longer term, TTWO stock is down 34% from levels seen in late 2020. This can be attributed to 1. the company’s P/S ratio falling a significant 43% to 4.4x trailing revenues, 2. a 49% rise in its average total shares outstanding to 169 million, partly offset by 3. Take-Two Interactive’s revenue growth of 73% to $5.3 billion over the last twelve months. Our dashboard on Why Take-Two Interactive Stock Moved has more details.

Take-Two Interactive’s significant revenue growth can be attributed to its last year acquisition of Zynga, which has been seeing a steady rise in revenue over the past few years, led by its popular mobile gaming franchises, including Merge Dragons and Empires & Puzzles. Take-Two Interactive’s big franchises, including Grand Theft Auto and NBA2K, have also been doing well. The company is expected to see a rise in sales driven by the continued expansion of Zynga’s games and the much-awaited launch of Grand Theft Auto (GTA) 6, likely to be released next year. Take-Two Interactive’s revenue rose 53% y-o-y in fiscal 2023 (the fiscal ends in March). After a relatively calm fiscal 2024 (likely), sales are expected to surge 45% (per the consensus estimates) to over $8 billion in fiscal 2025, owing to the GTA 6 release. These numbers may optically appear to be high, but they make sense, given the popularity of this franchise. For perspective, GTA 5 has sold 180 million copies since its release in 2013, garnering close to $8 billion thus far. The new game in the franchise is likely to surpass this figure in fewer years.

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Although the company has been able to grow its sales, its operating margin has contracted to -22% in fiscal 2023, vs. 14% in 2020, due to higher marketing costs and some one-off costs related to the Zynga acquisition. Our Take-Two Interactive Operating Income Comparison dashboard has more details.

Looking at its stock price, we believe TTWO stock has more room for growth. At its current levels of $138, it is trading at 4.4x trailing twelve months revenue, compared to its last five-year average of 8.6x, implying it is undervalued. Our Take-Two Interactive Valuation Ratios Comparison dashboard offers more details.

While TTWO stock may see higher levels, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised by the counter-intuitive stock valuation for Take-Two Interactive vs. Microsoft.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

Returns Jun 2023
MTD [1]
YTD [1]
Total [2]
 TTWO Return 0% 32% 179%
 S&P 500 Return 2% 12% 91%
 Trefis Multi-Strategy Portfolio 3% 13% 256%

[1] Month-to-date and year-to-date as of 6/3/2023
[2] Cumulative total returns since the end of 2016

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