Take Two Interactive - Investing Thesis


#1

I have been looking at TTWO for while now. There are a few things I really like about the company and a few things I am not so sure about.

On the whole, the company has great potential.

Overview
TTWO owns some of the most popular gaming franchises today. These include Red Dead Redemption, Bioshock, NBA Sport, Civilisation, Max Payne, LA Noire and of course GTA.

The company started with company was founded in 1993. It wasn’t until 1998 that the company secured it’s largest franchise - GTA for $14 million.

TTWO formed its strategy during the 2000s of acquiring leading franchises art discounts. During this time period, it acquired:

Civilisation
Bioshock
Top Spin

It also grew the GTA brand. By 2003, the company had revenues of $1 billion.

A number of controversies and falling revenues shook the company during the late 2000s. In 2006 it lost $163 million. A board coup by the then-owners Zelnick Media installed a more responsible management team and set the company on its present course.

The new chairman Strauss Zelnick made a number of strategic commitments and outlined his vision for the company in 2007:

-focus on building quality franchises
-think long-term
-keep costs under control
-let the creatives at it
-focus on cash-flow (micro-transactions)

Focus On High Quality
Take Two have a laser-focus on creating long-term franchises. This means creating games of exceptionally high quality.

Creative company’s fall into the trap of relying on earnings figures to understand the health of the business. They get businessmen to run a creative business to disaster effect.

The core issue is that for most businesses, net income is a great measure of a business’s health. Not with creative companies. You could have a gaming business which is earning a lot of cash, but is creating rubbish games.

One only has to look as far as mobile gaming company Zynga to observe this phenomenon in action:

The figures can disguise things - but only for so long. If no one thinks your games are good, you are toast.

This is why I really like TTWO.

In their 2007 report, they laid out a vision for a company’s creative output.

Our primary strategy is to publish a select number of high quality titles based on internally owned and developed intellectual property, which tends to offer higher margins than licensed products. We currently have over 15 proprietary brands which we expect to leverage in the future. In addition, we will selectively develop titles based on licensed properties, including sports, and also publish externally developed titles

Since 2007, the company has done just that.

The numbers taken from metacritic speak for themselves:

GTA III - 97% (based on 50 magazine reviews)

GTA Vice City - 95% (based on 62 magazine reviews)

GTA IV - 98% (based on 86 reviews)

GTA V - 97% (based on 66 reviews)

Red Dead Redemption - 95% (based on 96 reviews)

La Noire - 76% (17 votes)

When a 76% is your company’s dud, you are onto a winner.

GTA is easily the most successful gaming franchise in the last twenty years. The game has earned more than $6 billion since 2013 and sold $100 million copies.

These high ratings are not merely restricted to Take Two’s Rockstar Games Division either.

Sid Meier’s Civilisation IV, V and VI received a 94%, 90% and 88% rating respectively.

Quality Is The Lifeblood Of A Franchise
The power of a high quality output cannot be understated. As a franchise grows, each game becomes a marketing tool for past and future releases.

This reduces the cost of marketing over time while attracting a larger audience. Marketing is designed to inform consumers about a product. When your brand is assimilated with high quality, you have a competitive advantage.

This pheneomon crosses-over into other forms of media, like music. Hip-hop icon Kendrick Lamar released his album Untitled Unmastered without any promo in 2016. It debuted at number one in the billboard charts, because Kendrick’s name alone is enough to sell a product.

The marketing power of franchise extends into film-making as well. When you take the highest grossing films of all time… they are all franchises (Marvel, Star Wars, DC Comics, Harry Potter, etc).

Investing in high quality media franchises can produce long-term returns. With Take Two Interactive, you are not just investing in GTA VI. You are investing in all evergreen potential of all future GTA games and their in-app purchases!

Just look Star Wars as a reference point:

The franchise earned $1.5 billion (inflation adjusted) with the first five franchises. In the next forty years it yielded x4 in revenue. Today, the Star Wars is a healthy franchise very healthy. The force awakens earned $1 billion in 2015!

If GTA is a Star Wars, the franchise could continue for decades…bringing in a new generation of gamer with every release!


#2

I like Take Two as well…

But it’s the macro stuff that gets me:

  1. Consumer debt is soaring:

-Student loan debt is compounding greatly. According to CNBC… 30% of students can’t keep it with payments after just six years!

-The statistics and graphs published by lending tree do not paint a pretty picture either:

  1. Wage growth has stagnated since the financial crisis. The economist writes that in “rich world” economies, wages have only grown 8.4%.

Clearly, the rise in consumer debt is part of a longer term demographic shift…

Mainly because we are living in an era of ultra-low interest rates…

One wonders what will happen when they go back up!

For many families surviving on credit…

what happens when it becomes more expensive?!


#3

Okay, fair point…

Although the debt is really piling up…

This is a recent NYT article I saw:

Clickbait title, but still interesting read: