The big three U.S.-based video game publishers, Activision Blizzard Inc. (ATVI, Financial), Electronic Arts Inc. (EA, Financial) and Take-Two Interactive Software Inc. (TTWO, Financial), have been performing amazingly well this year. The companies are producing more revenue from higher margin digital sales of games and content.
Over time, game publishers have shifted to a new business strategy of selling additional content like expansion packs and downloadable content, which allows them to make more money off of games.
While all the video game stocks mentioned above continue moving upward at a strong rate, Take-Two Interactive holds a leading position in this trend as it is up nearly 110% year to date. With increasing digital revenue, Take-Two has been able to generate more consistent annual profit based on its cash generated from operations.
Another significant reason for the company’s impressive performance is the ongoing success of “Grand Theft Auto V,” which it released in 2013. It is the second-best-selling game, trailing closely behind Electronic Arts’ “Madden NFL.” The game publisher has already sold more than 80 million copies.
Apart from the original format, the game's online version has also been performing amazingly well and is generating significant in-game content sales. To continue benefiting from "Grand Theft Auto" online, the company will likely keep producing new in-game content regularly until the release of next installment of the series.
A few years ago, Take-two had a weak balance sheet, but the company’s financial condition has improved considerably with the advent of digital sales. The company's acquisition of Social Point for $250 million illustrates how digital revenue growth has transformed the game publisher into a sturdier and more profitable company.
On the other hand, Take-Two is also investing in e-sports, which has become a significant focus for the video game industry. The revenue from e-sports is projected to reach $1.5 billion by 2020, so Take-Two cannot afford to miss out on this rapidly growing market.
Although Take-Two currently lags behind Activision in the e-sports market, it is working to secure a solid position. Earlier this year, the game publisher partnered with the National Basketball Association (NBA) to develop NBA 2K E-sports league, which will debut next year. The company will have the opportunity to produce revenue from e-sports leagues via media rights, advertising and ticket sales.
The company's only problem currently is it does not have any major titles scheduled to be released in the upcoming months, whereas other major players are publishing a wide variety of titles before the holiday season.
Initially, Take-Two’s "Red Dead Redemption 2," the second installment of one of its most popular game franchises, was scheduled to be released this fiscal year, but was rescheduled for the first quarter of next fiscal year.
Summing up
While Activision Blizzard and Electronic Arts are considerably bigger than Take-Two, the company's stock price has actually outperformed both by a wide margin this year. Moreover, its growing digital sales will continue enhancing margins going forward.
The primary reason for being bullish on Take-Two is its immensely popular "Grand Theft Auto" franchise. All of the franchise's installments have been successful, and the upcoming installment is also likely to be a hit. In addition, the company is focusing on the e-sports market, which will have a positive impact on its top as well as bottom lines in the future.
Although Take-Two’s future looks healthy, the stock currently trades near an all-time high. As a result, investors should wait for a pullback before initiating a position in the stock.
Disclosure: No positions in the stocks mentioned in this article.
