Why Investors Pay a Premium for Take-Two Interactive Stocks
Major video game stocks have significantly outperformed the market this year as gamers have been spending a lot of screen time during the pandemic.
Investors placed the highest value on Interactive Take-Two (TTWO -2.13%)which currently commands a forward price-to-earnings (P/E) ratio of 36 times analysts’ earnings estimates for fiscal year 2021. Both ActivisionBlizzard and electronic arts have a forward P/E of just around 26 at the time of this writing.
One of the reasons Take-Two’s P/E is higher is because management forecasts lower revenue and earnings this year as the company faces a leaner games roster and higher expenses for new versions in preparation.
But given earnings expectations for fiscal 2022, Take-Two still commands a higher P/E of 31 times the consensus earnings estimate for that period. Here’s why investors pay a big premium to buy shares of the Grand Theft Auto maker.
Grand Theft Autothe outperformance of may continue
In June, Take-Two’s Rockstar Games announced that Grand Theft Auto V would come to Microsoftof the Xbox Series X and sony‘s PlayStation 5. The new, expanded and graphically enhanced version of the best-selling franchise will be released during calendar 2021.
Additionally, there will be a standalone version of grand theft auto online releasing in the second half of 2021. This new standalone version will be available for free exclusively for PlayStation 5 owners for the first three months after the game’s release.
grand theft auto online is the multiplayer part of the game. It is very popular and is currently included for free with Grand Theft Auto V. But the announcement seems to suggest that Take-Two plans to charge for multiplayer access on the next generation of consoles, which could be important for revenue growth. As an added incentive to upgrade, Rockstar will offer additional content exclusively for new consoles and PCs.
For several quarters, management has remained cautious in its outlook for the sale of Grand Theft Auto, but the game still exceeded expectations. It has sold 135 million units since 2013, a 22% increase from the year-ago quarter. Rockstar is good at making games, and it’s rewarded for it.
The longer it is Grand Theft Auto V works well and sells more copies, the greater the integrated audience will be for the sixth installment, which could be released during the new generation of consoles. This is probably one of the reasons why stocks are currently trading at a premium.
Other franchises are growing too
Rockstar is also developing the Red Dead Redemption franchise, which is kind of like a sister title to Grand Theft Auto. Both games follow the same game design, except one is set in a modern city, while the other is a Wild West adventure. the original Red Dead Redemption sold about 15 million copies. Red Dead Redemption 2 released in the fall of 2018 and has already sold 32 million copies.
The NBA 2K The franchise also continues to grow, with net bookings on track to be the highest of any 2K sports title in history.
Borderlands 3 released last year and has sold 10.5 million units so far, up 69% from the previous title in the series.
There is a pattern here. take two sets a record for making its top franchises bigger and better with each new release, and that seems to be reflected in the title’s high valuation.
Throw on it a deep pipeline with 93 titles in development for release within the next five years, including upcoming officially licensed NFL football games, which is why investors are confident of Take-Two’s growth prospects.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a board member of The Motley Fool. John Ballard owns shares of Activision Blizzard, Electronic Arts, Microsoft and Take-Two Interactive. The Motley Fool owns shares and recommends Activision Blizzard, Microsoft and Take-Two Interactive. The Motley Fool recommends Electronic Arts and recommends the following options: $85 Long Calls January 2021 on Microsoft, $115 Short Calls January 2021 on Microsoft, $75 Long Calls January 2022 on Activision Blizzard, and Short Calls $75 $ of January 2022 on Activision Blizzard. The Motley Fool has a disclosure policy.