With the economy slowing down, some investors might be wondering how top video game producer Take-Two Interactive(NASDAQ: TTWO) will hold up in the near term.
Video game-related sales have certainly softened this year. The trend has been most pronounced in gaming hardware. Microsoft reported that its Xbox hardware revenue fell 11% in the quarter that ended June 30. Meanwhile, Logitech International, a leading manufacturer of gaming peripherals, reported a revenue decline of 16% in gaming products in its most recently reported quarter.
Take-Two will report its earnings for those three months on Monday, Aug. 8. Competitor Activision Blizzard just reported declines in its revenue and monthly active users for the second quarter, so expectations for Take-Two are low. Pessimism has driven its stock price down by 25% year to date.
That said, there are two key aspects of Take-Two's business that the market appears to be missing that could set it up as a buying opportunity.
Take-Two can deliver during a recession
One advantage that video games have over other entertainment options during a recession is their value per dollar. A new release that costs around $50 can provide dozens or hundreds of hours of entertainment spread out over months, or even years. And that doesn't count the number of free-to-play titles available, including Electronic Arts' Apex Legends, which is one of the most popular games right now.
The high relative value of video games as a form of entertainment can explain why Take-Two was able to grow its revenue during the financial crisis in 2008. Between the end of calendar 2007 and 2009, Take-Two's revenue increased by 2.5%, with a sharp rise during 2008 following the release of Grand Theft Auto IV.
The company went on to release Grand Theft Auto V in 2013, and that title has given players tremendous value over the last decade. The latest installment in the series is still one of the top contributors to the company's revenue every year.
Grand Theft Auto Online, which also debuted in 2013, and allows players to complete missions with friends, continues to receive new updates that keep players coming back for more. In the company's fiscal 2022 fourth quarter, which ended March 31, that game's player base was up by 74% compared to the same quarter in fiscal 2019 -- an impressive rise for a game that has been out for nine years.
Take-Two just launched the online multiplayer feature as a stand-alone title that retails for $20 on Sony's PlayStation 5 and Microsoft's Xbox Series X/S. And it's further capitalizing on the popularity of the game with a new subscription service (GTA+) that gives players extra content.
Beyond that, the company should see more growth from its best-selling NBA 2K franchise this year. Wedbush Securities analyst Michael Pachter expects NBA 2K23, scheduled for release in September, to generate record unit sales for Take-Two.
The stock offers substantial long-term upside
Take-Two was able to prosper during a severe recession in 2008, but most of its sales increase during that period was due to the launch of GTA IV. While the company has a deep pipeline of new releases scheduled for the next three years, there are no major new titles coming this year other than NBA 2K23 to drive sales sharply higher.
However, one catalyst worth watching is the acquisition of mobile game maker Zynga, which Take-Two just completed in May. The addition of Zynga brings top mobile games such as FarmVille and Words with Friends to Take-Two's catalog. Analysts expect the combined company to grow bookings (a non-GAAP measure of revenue) by 85% in the company's current fiscal year.
The ongoing monetization opportunities of Grand Theft Auto and Zynga's mobile business make Take-Two one of the best options among top video game stocks right now. Any surprise growth from NBA 2K23 would be a bonus.
Analysts expect Take-Two's earnings per share to double over the next five years to $11.43. The stock has recently traded above 30 times earnings, but applying a price-to-earnings ratio of 25 to that estimate would still put the stock price in 2027 at $285 -- more than double the current quote.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Activision Blizzard, Logitech International, Microsoft, and Take-Two Interactive. The Motley Fool recommends Electronic Arts and recommends the following options: long January 2023 $115 calls on Take-Two Interactive. The Motley Fool has a disclosure policy.