Activision Blizzard (NASDAQ: ATVI) and Electronic Arts (NASDAQ: EA) are the bellwether video game stocks, thanks to their leadership positions in the industry. And both have a major size advantage over Take-Two Interactive (NASDAQ: TTWO).
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But interestingly enough, Take-Two's stock price has actually outperformed Activision and EA over the last three years by a considerable margin (same goes for one and five-year periods as well).
As EA and Activision invest heavily in top-selling titles and new opportunities in the gaming industry, Take-Two is delivering its own wins with one hit after another. At the same time, it's starting to amass the financial resources necessary to follow the lead of its larger rivals.
Putting together the pieces
As you can see in the table below, Take-Two is a distant third when it comes to scale among the three companies:
|Revenue||Operating Cash Flow||Net Cash (Debt)||Market Cap|
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But a bigger top line doesn't necessarily reflect a company's ability to create better games. Take-Two has its own arsenal of best-selling franchises, and there's a big one hitting store shelves next year.
The successful launch of Red Dead Redemption in 2010 was an important milestone. The western action game sold 13 million copies through 2011. The second installment -- Red Dead Redemption 2 -- is scheduled for release in spring 2018, and early signs point to a strong launch next year. Heading into fiscal 2019, Take-Two will have two major franchises in Grand Theft Auto and Red Dead Redemption to generate revenue.
One sign of just how big Red Dead 2 will be is management's guidance for next year, which calls for $2.5 billion in revenue and $700 million in cash flow -- the same amounts earned in fiscal 2014 when Grand Theft Auto V launched.
E-sports taking off
E-sports is a major focus for the industry these days. The largest gaming companies can't afford missing out on the 385 million people who either watch or participate in e-sports, and Activision, EA, and Take-Two have all invested in this fast-growing $1 billion market.
Activision is the clear leader in the space right now, with Overwatch, Starcraft, Call of Duty, and other games enjoying some degree of presence on the e-sports scene. The only title Take-Two owns that has e-sports appeal is NBA 2K. Earlier this year, the company announced a partnership with the NBA to form a professional e-sports league based on the popular NBA 2K franchise.
I should also point out that Grand Theft Auto V is one of the most watched games on Twitch -- the popular game streaming site owned by Amazon.com. Games trending on Twitch stir up brand awareness for those titles, which helps generate more revenue.
Mobile gaming and advertising
Lastly, Take-Two's acquisition of Social Point earlier this year gives the company a stepping stone to begin a growth path in the $40 billion mobile gaming market.
Activision and EA are ahead of Take-Two in these efforts as well. The former purchased King Digital Entertainment last year for $5.9 billion, and EA has been heavily invested in mobile gaming for several years. Those mobile games generate over $600 million in annual revenue for EA, while King generates about $500 million in operating income for Activision. Take-Two has a long ways to go to catch up -- Social Point generated less than $100 million in revenue in 2016. But management has strategically taken a cautious approach to acquiring its way into the segment.
At a company presentation earlier this month, CEO Strauss Zelnick commented on his conservative approach and why Take-Two is behind major rivals in mobile gaming:
I just saw the business as it was, which is the hit ratios in the business are teeny, and there was very few companies that were any good at creating multiple hits. And the companies that did have a track record in creating multiple hits were super valuable and super expensive. Companies like Super Cell that sold for $9 billion to Tencent or King that sold for nearly $6 billion to Activision. And there weren't a lot of opportunities to invest in this space behind an enterprise that had a proven ability to have multiple hits, because hit ratio in the mobile business is very, very small, less than 1%.
Smaller but still mighty
As Take-Two grows its revenue and cash flow, the company will have more flexibility to invest or acquire valuable partners like Social Point. Activision's history is full of major mergers and buyouts. With $1.4 billion in cash on the company balance sheet and core franchises poised to generate more profits than ever, Zelnick is starting to make the same moves.
In the race among video game publishers, Activision and EA have often served as models of what lies in store for Take-Two, and the company has handsomely rewarded shareholders despite being the "runt" of the litter.
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John Ballard owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard, Amazon, and Take-Two Interactive. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.