Why Take-Two Could Be a Big Winner for Long-Term Investors

By Motley Fool Staff Markets Fool.com

The gaming industry has seen explosive growth this year. Take-Two Interactive (NASDAQ: TTWO), the company behind franchises like Grand Theft Auto and Red Dead Redemption, is the smallest of the big three players in the space, but it could be a real winner for investors.

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In this clip from Industry Focus: Tech, Motley Fool analysts Dylan Lewis and David Kretzmann dive into Take-Two Interactive and how long-term investors might benefit from looking into the company. Find out how Take-Two is bringing in huge swaths of cash even on years when it doesn't release new titles, what to make of the company's delay of its newest release, and more.

A full transcript follows the video.

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This video was recorded on May 26, 2017.

Dylan Lewis:David, last but only least in the sense of market cap, we're looking at Take-Two Interactive. This isthe publisher behind theGrand Theft Auto series, theNBA 2Kfranchise, sothey have some sports exposure there. Take-Two iscurrently a fraction of the size of these other publishers. I think they'reabout a quarter to a fifth of the size of EA andActivision Blizzard. So,they're a little bit smaller,the profile is a little bit different there.I know the company recently announced a minor roadblockin the delay of itsrelease ofRed Dead Redemption 2title. Can youtalk little bit about what's going onwith the company, and whether or not that's something people should worry about?

David Kretzmann:Yeah.Red Dead Redemption 2was originally supposed to come out late summer, early fall this year, 2017. They'vedelayed that release until spring 2018. Initially,that would raise a yellow flag, but taking a step back here. Take-TwoInteractive has twomajor studios. They have 2K,does a lot of the sports franchises likeNBA 2K,WWE. Then,they have Rockstar,which is the studio behindGrand Theft AutoandRed Dead Redemption. AndRockstar has a history, going back 15 years or so, of delayingvirtually every major game that it comes out with,so this is really just par for the course. So,it's nothing to me that's very concerning. They'rebasically saying, we want to make sure this isthe best we can possibly make it. Andpart of the reason they're delaying it ismore and more people are getting the latest generation of consoles. So,you have PlayStation 4,Xbox One, thathardware is a significant upgrade from the previous generation ofgaming consoles. So,they're saying, we can make this game even better toadapt to thatlater hardware.

So, for me,I would much rather they delay it six months or even a year, andmake sure the game is as good as it can possibly be,rather than putting out a product that they feel is subpar.I think that's part of the reason whyGrand Theft Autohas been anincredible franchise. Speaking to thepower of this transition to digital, the lastGrand Theft Autowas released in 2013,Grand Theft Auto V. But it still makes up38% of the company's total sales today. That just shows you,more and more people are continuing to buy the game and play the game, and management says,Grand Theft Autoonline, that online experience,continues to surprise us and beat our ownexpectations. With Take-Two Interactive now, about a quarter of their revenue comes from what they callrecurrent consumer spending.I feel like they could come up with a better phrase than that.

Lewis:Ihave to ask you what it means.

Kretzmann:That's not a surprise. It's made up ofthe money that players will spend onvirtual currency within the games, downloadable add-on content within the games, andmicrotransactions. Essentially, any money thatplayers are spending in the game once they own that game. That's25% of the revenue now. Again,that's very high margin, sticky revenue.

Lewis:It's all digital, right?

Kretzmann:Right,it's all digital. That just shows that, once players do download or buy these games, they're staying very engaged, and they'respending more money over time. Inthe case ofGrand Theft Auto, you have a four-yearseparation between when the last title came out,but it's still contributing over a third of your total revenue. That'spretty astounding, and I think that's part of the reason that Take-Twois a little bit riskier. They still havea lot of dependence onGrand Theft Auto. But I don't see thatdrifting down at any point. There have beenover 80 million units sold now ofGrand Theft Auto V. So,it has an incredibly long shelf lifeas a franchise. In the meantime, you haveRed Dead Redemption,which, the first one got rave reviews,there's a lot of anticipation forRed Dead Redemption 2, and since they're delaying it a few more months to make sure it'sreally the highest quality it can be,it'll probably be a pretty successful game.NBA 2Kcontinues to haveincredible engagement each year whenthey come out with a newNBAtitles. Again,all these companies are excelling atfinding ways to make really compelling games that areengaging over a long periodof time. I thinkas you're transitioning to this digital area, that's really the key. All threeof these companies are doing a really nice job at that.

Lewis:Iget the sense in this conversation that, really,there's room for all of these companies tosucceed, they all have theirseparately carved out niches. There'sobviously going to be competition,particularly with sports licensing, for games, with Take-Two and EA, as thosecontracts come due. But, the sense that I get is,there's room for all these players to play.

Kretzmann:I think so. This is a global game as well.I don't know the exact breakdown for all the companies. Butin the case of Electronic Arts, well over half their revenuecomes from outside the U.S.FIFAis really aglobal phenomenon.

Lewis:It's huge abroad.

Kretzmann:Huge, yeah. That also means that canmake it even more compellingif you're directly competing against literally tens of millions of playersaround the world. So,it makes it really interesting as a player tohave that kind of opportunity to engage with players that way. Iforget what your question was.

Lewis:Itseems like plenty of roomto operate for all of them.

Kretzmann:Yeah,the global market is huge. And as theeconomy worldwide improves, andsteadily over time, the worldeconomy is becoming more productive,people will have more leisure time. So,really the main competition for any of thesekinds of companies areFacebook, Twitter,Netflix, YouTube,wherever you spend your leisure time,that's really the competition there.I recently watched an interview with Reed Hastings, the founder and CEO ofNetflix, and he said the biggest long-term threat for Netflix is if, at some point,there is some content that's just so compelling thatpeople get bored sitting down watching just something, dormant. Thatgives you a sense for how these media companies should be thinking about the long term. ButI think people love being entertained, theylove the chance to compete andconnect with friends and other people around the world. I don'tsee this slowing down anytime soon. And,in the meantime,you have stuff, which,this is hard for me to wrap my mind around, but e-sports. Youactually have people watching other people play video games. Andthat's something that's that wasespecially popular in Asia, butnow in the U.S. and Europe, you'realso seeing that on the rise, andmore and more companies looking tosponsor, advertise at e-sportstournaments. So,I certainly see a long-term runway for this space, tocontinue doing well.

David Kretzmann owns shares of ATVI, EA, FB, NFLX, Take-Two Interactive, and TWTR. Dylan Lewis owns shares of FB. The Motley Fool owns shares of and recommends ATVI, FB, NFLX, Take-Two Interactive, and TWTR. The Motley Fool recommends EA. The Motley Fool has a disclosure policy.