I have been looking for a stock which has:
-exposure to Chinese market
-invested in VR and AR
I found Take-Two Interactive very interesting…
Take Two owns the rights to multiple gaming franchises such as:
-NBA - 2K
-Sid Meier’s Civilisation
-Tom Clancy Rainbow Six
-Sid Meier’s Starships
And Grand Theft Auto - probably the most famous gaming franchise on the planet!
The financials for the company look incredibly solid - even if the company is significantly over-valued at the moment
The company has:
-enormous quantities of cash
-it has positive free cash flow
-net income of $181 million last year
Operating margin - 8.32%
Net Margin - 9.51%
ROE - 15.53%
Take Two is now positioning themselves towards the e-sports market. CEO Travis Zelnick has spoken about the potential growth in -esports.
Interestingly enough, the CEO sees e-sports as means of boosting interest in their own titles, rather than seeing it as the future of entertainment:
“We have yet to see esports as a stand-alone profitable business. We see it more as an adjunct to consumer engagement in our titles.”
“We believe that the NBA 2K e-sports league has a long-term potential to generate significant revenues and profit through broadcasting rights, ticket sales, pay-per-view events, sponsorships, advertising, and merchandise, just like any other professional sports league.”
Take Two are also interested in the application of AR to games…
Value Of Game Portfolio
Take Two’s gaming portfolio is of huge interest to me. Media companies with very strong franchises share characteristics:
-their strong franchises create long-term revenue streams. This is known as The Lindy Effect - a concept that the future life expectancy of some non-perishable items like book or a game is proportional to their currency age. so that every additional period of survival implies a longer remaining life expectancy. In other words:
The longer something has existed, the longer it will exist in the future
What Does Mean For Shareholders?
If the franchise value of Take Two’s games continues to grow, the portfolio of games and the income they generate will compound greatly over time…
We see this already in Take Two’s development programme. Franchises such as Grand Theft Auto, NBA 2K, Bioshock, Mafia were popular when I was growing up - and they remain popular to this day.
If the Lindy Effect holds true, these franchises will still be popular in 10-20 years time.
Another advantage of this gaming portfolio is that Take-Two can create VR and AR experiences and games based on their franchises. Even if they miss the boat initially (a common occurrence for larger, bulkier companies), they could still put out a GTA VR and it would probably be insanely successful.
Take Two’s CEO
I also like Take Two’s CEO attitude - Strauss Zelnick.
Zelnick understands the importance of building a stellar gaming franchise - that’s why he bought Rockstar, Sed Meier’s titles and Bioshock…
He sees retaining incredible creative talent as his key responsibility as he commented in a 2015 Fortune article:
“It’s my job to attract, retain and provide the resources to the best creative talent in the business,”
“And it’s my responsibility to make sure that when they deliver a product that we have the best marketing.”
He also has an incredible track record at the company. In 2008 the situation looked very bleak.
• Losses reached $184.9 million
• Former CEO pleaded guilty to fraudulent accounting
Today the enterprise is back on course…
I think the biggest thing that appeals to me about Strauss is his skin in the game who is in for the long-run:
As his 2015 interview states:
“I’ve only sold stock for tax purposes and I believe I’m now the largest single shareholder,” he says. “Our group took over the company in 2007. Here it is 2015 and I feel like it’s just the beginning.”
Overall, I think take-Interactive is a great bet for e-sports and mixed reality…
I don’t think the company will be the first to these technologies, but their substantial cash position means they could dive into either if they see the opportunity.
I also see their portfolio of gaming franchises that is fairly safe going forward.
The company is currently valued at about $12 billion. With a PE ratio of 60, Take Two is expensive. If the price came down significantly, I would load up. Take-Two is smaller in comparison to EA and Activision - I think the stock could easily reach their market values.
Gamers are savy and they know when they are being ripped off. EA and Activision have suffered significant reputational damage by focusing on their shareholders before their gamers. In the short-term, this is profitable, but not in the long-term. In T2’s CEO, I see a different attitude. One which focuses on creating lasting franchises and building stellar creative teams, rather than simply making a quick buck. I believe keeping gamers on-side will lead to far better gaming experiences and better long-term shareholder value.
Take Two also seems to have a prudent attitude to finances. This manifests itself in the companies high cash levels. I think investors should take a closer look where Take Two is holding its cash. If they are holding everything in corporate bonds, or any type US government securities, it could be a dangerous move. Smart money is saying that the bond market is entering into a bear market after a 30+ year bull-run:
disclosure: I hold no positions in Take-Two and have no affiliation with them. All views are my own.