New products have the potential to boost Take-Two Interactive Software Inc.'s (TTWO, Financial) financial performance. Recent releases have enjoyed positive reviews, while new features such as online multiplayer options may increase its appeal among potential customers. A pipeline of new products may improve its exposure to areas such as mobile, while embracing the latest technology.
The company’s recurring revenue is increasing, with fresh content and opportunities for additional purchases within previously released titles encouraging higher spending per user. This could provide incremental revenue growth, while an exposure to esports could allow it to capitalize on a growing industry.
Although the stock has declined 11% in the last year versus an increase of 3% for the S&P 500, it seems to have investment appeal.
New products
The recent release of "NBA 2K19" and "Red Dead Redemption 2" have the potential to catalyze Take-Two’s financial performance. Both titles were released with critical acclaim, with the latter exceeding sales expectations since its release and achieving the biggest-ever opening sales weekend in the gaming industry.
The company is planning to launch an initial public beta of "Red Dead Online," which is an online connected experience that will feature constant updates and adjustments. The online version will be free with the purchase of "Red Dead Redemption 2" and could act as a further incentive to purchase the product, with past releases such as "Grand Theft Auto V" becoming increasingly popular among consumers as a result of their online multiplayer capabilities.
Take-Two's future releases could further catalyze its stock price. Its pipeline of new titles includes "Borderlands 2," which will be available through digital download with virtual reality-specific features. The company will also release additional content in order to drive consumer engagement in existing titles, while broadening its offering in the increasingly popular mobile device segment. The company’s mobile-focused Social Point development unit has 10 games in its pipeline and could account for an increasing proportion of future sales.
Recurring revenue
Recurring revenue increased 28% last quarter, accounting for 53% of total net bookings. It is set to rise as strong engagement and fresh content encourages players to buy virtual currency on titles like "NBA 2K19." Recurrent spending within the product increased 70% last quarter to reach a new record. It was also the largest contributor to recurrent spending for the period. "NBA 2K19’s" average revenue per user and the percentage of players who buy virtual currency has increased at a double-digit rate versus "NBA 2K18." Additional content is due to be released for "Grand Theft Auto V," while Social Point’s mobile titles, "Dragon City" and "Monster Legends," are contributing to improved revenue growth for the company.
Take-Two recently announced more teams were sold during the quarter for NBA 2K League, which is a professional esport based on the franchise. Global esports industry revenue is expected to grow from $655 million in 2017 to $1.6 billion in 2021. The company is due to invest further in the league, which is expected to enhance engagement and recurring revenue as it heads into its second season.
Long-term growth
Take-Two’s valuation could suggest that it lacks a margin of safety. For example, it has a price-earnings ratio of 58 using last fiscal year’s earnings per share. Even factoring in growth in earnings in the current fiscal year and next year, the stock has a forward price-earnings ratio of 20.6. This could mean its recent downward continues in the short run, with investors potentially seeking a larger discount to its intrinsic value due to its forecasted earnings growth rate of less than 4% for fiscal year 2020.
The long-term prospects for the video gaming industry, though, appear to be relatively positive. The industry is expanding at a double-digit rate and is expected to reach $235 billion by 2022. A wider range of titles and improved technology means that by 2021, there are projected to be 2.73 billion gamers worldwide, which would represent an increase of 24% versus 2017. Take-Two is seeking to capitalize on the widening demographics of the gaming industry through titles like "Carnival Games," which has a family-friendly price point of $39.99 and is aimed at people of all ages.
Outlook
New products could improve Take-Two’s stock performance, with additional features and fresh content encouraging users to increase overall spending. A strong development pipeline of new titles in mobile could diversify the company’s customer base and allow it to capitalize on wider industry demographics in the future.
Recurring revenue may catalyze the company’s financial performance, while investments in areas such as esports may provide it with access to increasingly popular segments. Although the stock has a relatively high valuation, the wider industry’s growth potential could provide a tailwind. After underperforming the S&P 500 in the last year, the stock appears to have investment potential.
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