Disclosure: Affiliates controlled by Eric Jackson hold long positions in Take Two I nteractive, Ubisoft and Activision Blizzard.
Take Two Interactive is one of my favorite stocks for the balance of 2018 and into 2019. After more than doubling in 2017, the game publisher responsible for the Grand Theft Auto franchise has seen a sharp pullback in its stock this year along with the rest of the sector.
Given this poor recent performance and with few immediate catalysts on the horizon, the stock could get easily forgotten on your list of stocks to watch. I think that's a mistake. It's why I added to my position a couple of weeks ago.
Before I go over the reasons why I find the stock attractive, there are several reasons why the stock has had a forgettable last few weeks:
- The stock is off 25 percent from its all-time highs earlier this year, after its fourth quarter results beat on the bottom line but not on the top line. It was a classic "good but not good enough" quarter.
- Fortnite's supernova popularity this year has had some analysts speculate that it will sap profitability from some of Take Two's most popular franchises like Grand Theft Auto. as well as from other game publishers.
- The next big "catalyst" for the stock won't come until the launch of Red Dead 2 in October.
- Some wonder if Red Dead 2 will be delayed again after 2 prior delays.
Yet here are the reasons why I'm still bullish on Take Two and why I find it attractive at these levels:
There's usually no better predictor of a future return for a given stock than the price you're able to enter at. The significant pullback in the short-term stock price for Take Two allows you to price in a lot of the short-term risk mentioned above. The RSI for the stock is currently around 40 and was 30 a couple of weeks ago.
Fortnite skews younger:
Fortnite has been a phenomenon. It has attracted a wide variety of users. However, it's undoubtedly a game which skews younger — especially boys from 9 years old to 15 years old. Are the bulk of those users dropping their play of GTA Online to play Fortnite instead? It's unlikely in my view. So while there might be some short-term impact from Fortnite, I think it's already priced in. And we will have to see whether Fortnite maintains its popularity. According to Google Trends, Fortnite hit its top popularity in the second week of March and it saw a week over week decline this past week.
Red Dead 2 is not just any new game but a new Rockstar game:
Red Dead Redemption 2 is a Rockstar Studios game. This doesn't guarantee that it will go on to become a Grand Theft Auto, which is now the biggest selling franchise ever. As of the last Take Two earnings report, Grand Theft Auto V — released more than 4 years ago — had topped sales of 90 million units. But Rockstar knows how to build a visually stunning game — especially when it's a sequel. With Red Dead, you're getting both. The first version of Red Dead Redemption was released in 2010 and sold over 15 million units. They have a chance to significantly increase that number of this sequel this time around.
Red Dead 2 has been delayed twice already:
Red Dead 2 has been delayed twice, and could be delayed again. Yet, I think it's unlikely at this point. The last delay (from last year) gave them almost another whole year before it ships. This date looks likely to stick.
Red Dead 2 should be much bigger than expected:
If you look at Take Two's analyst earnings estimates for 2019, they're all over the map. The lowest EPS estimate for next year is $3.15, while the highest is $6.47. According to Bloomberg, Take Two has the widest EPS estimate distribution of its peers for 2019. There's a standard deviation of 80 or 16.2 percent of mean value for Take Two versus 3.5 percent for Activision Blizzard.
So what is the potential for the game to sell in year 1? That's the question on which Take Two's stock price will hinge later this year and into 2019.
Ubisoft is currently at all-time highs because of the initial first week of sales for its newest title, Far Cry 5.
We will likely know how Red Dead 2's is performing after a similarly short amount of time.
All the potential is there for a big holiday hit for Take Two. It's a Rockstar game, it has 15 million units sold of its first iteration (now 8 years old), it just released a 4K version of the older Red Dead game on Xbox to great acclaim and Westworld -- inspired by open-world games like Red Dead, BioShock, and GTA -- is about to start its second season.
If Red Dead 2 sells 20 million units in its first year at an average combined first year total revenue of $110 per unit (price of the game plus the add-on content purchased) — which is a number similar to what Ubisoft reported for their top games in the most recent quarter — they would generate revenues of $2.2 billion.
The average analyst estimate for all of Take Two's revenues next year is $2.92 billion. A big hit would lead to a string of upgrades.
Further upside possibilities:
Besides a big boost from Red Dead 2, there are further potential upside catalysts for Take Two going into next year:
T- There were rumors just last week of a new secret BioShock in the works.
- A Borderlands 3 game is due for late 2019.
- Although GTA Online is still doing well for Take Two, why couldn't there be an announcement of - GTA VI for 2020 sometime next year? A 2020 release date would be 7 years after GTA V. A new iteration of the best-selling franchise ever would immediately put a jolt into the stock.
- Take Two management has been opportunistic about buying back stock when there has been a pullback. I wonder if they have done the same in these last few weeks — especially when the stock dropped below $100/share.
The bottom line: There are always unknowns with counting on a future hit game, but there has been such a sharp pullback in recent weeks that Take Two now looks particularly attractive leading into a ramp up of expectations of what Red Dead 2 will bring in October.