The stock of Take-Two Interactive Software (NAS:TTWO, 30-year Financials) is believed to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $180.15 per share and the market cap of $20.7 billion, Take-Two Interactive Software stock appears to be modestly overvalued. GF Value for Take-Two Interactive Software is shown in the chart below.
Because Take-Two Interactive Software is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 12% over the past three years and is estimated to grow 17.50% annually over the next three to five years.
Link: These companies may deliever higher future returns at reduced risk.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Take-Two Interactive Software has a cash-to-debt ratio of 12.93, which ranks in the middle range of the companies in Interactive Media industry. Based on this, GuruFocus ranks Take-Two Interactive Software's financial strength as 7 out of 10, suggesting fair balance sheet. This is the debt and cash of Take-Two Interactive Software over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Take-Two Interactive Software has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $3.3 billion and earnings of $4.27 a share. Its operating margin is 15.03%, which ranks better than 70% of the companies in Interactive Media industry. Overall, GuruFocus ranks the profitability of Take-Two Interactive Software at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Take-Two Interactive Software over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Take-Two Interactive Software is 12%, which ranks in the middle range of the companies in Interactive Media industry. The 3-year average EBITDA growth is 17.2%, which ranks in the middle range of the companies in Interactive Media industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Take-Two Interactive Software's return on invested capital is 15.79, and its cost of capital is 4.62. The historical ROIC vs WACC comparison of Take-Two Interactive Software is shown below:
In short, Take-Two Interactive Software (NAS:TTWO, 30-year Financials) stock shows every sign of being modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Interactive Media industry. To learn more about Take-Two Interactive Software stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
