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Where Will Take-Two Interactive Stock Be in 3 Years?

Motley Fool - Sat Dec 30, 2023

The next several years could be transformative for Take-Two Interactive's (NASDAQ: TTWO) business. While most companies like to claim that they're on the cusp of huge sales and earnings growth, the video game publisher is actually on that path.

That's because management is planning dozens of significant title launches that, combined with its new casual gaming portfolio, should propel the company toward the highest levels of its industry. After trailing leaders like Electronic Arts for years, Take-Two has a good shot at challenging EA in 2024 and beyond.

Here's how that busy release period might play out for the business -- and the stock.

Changing gears

Wall Street is expecting a major shift in operating momentum beginning in the fiscal 2025 period that begins in early April. Sales this year are only on track to rise by about 4%, according to most analysts. That's roughly the same level of growth that investors are seeing from peers like EA and it reflects sluggish demand trends in the industry following huge gains during the pandemic.

Take-Two also pushed a few launch titles out of this fiscal year and canceled several others as part of its cost-cutting program. These moves have contributed to an unusually weak year for profits. Most Wall Street pros predict that earnings will drop nearly 40% in fiscal 2024.

The product pipeline

Overall sales are expected to jump 40% from fiscal 2024 to fiscal 2025. That's a roughly $3 billion addition to Take-Two's annual revenue. The rebound will be powered by new releases.

We know a new Grand Theft Auto launch will be one key part of that pipeline. There hasn't been a new entry in that franchise, Take-Two's biggest by far, in over a decade. The company revealed that the next major installment will arrive sometime in calendar 2025. There are several other unannounced titles, too, that investors will learn more about over the next few quarters.

Management isn't expecting to put shareholders through volatile sales swings in conjunction with these releases, either. Executives believe they can maintain the positive momentum in fiscal 2026 and beyond now that Take-Two has such a large portfolio. That's great news for investors who were disappointed to see sales drop in periods between large title releases.

The risks to watch

Investors who are hoping to benefit from any share price rally associated with Take-Two's potential rise to the top ranks of the industry over the next few years face few big risks. The first is that the next few game releases might not live up to all the hype. One or more titles could endure delays or meet with a lukewarm reception from gamers. That happens from time to time in the industry despite all the best efforts of publishers.

Then there's the possibility of paying too high a price for the stock. Take-Two shares are valued at about the same price-to-sales ratio as EA right now, which is already generating sustainably strong earnings and about $8 billion in annual revenue.

As a result, you're accepting more risk with a Take-Two investment today as you wait for the expected sales spike in the coming years. Yet the video game stock could still be a good fit for investors seeking potentially high returns. Take-Two will likely be generating much higher annual earnings in three years, which is a sure path toward rising shareholder returns over time.

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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Take-Two Interactive Software. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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