Is it time to go and play with Take Two Interactive?
Opdateret: aug. 22
I have previously looked through the historical numbers of the three major video game developers. One of the companies that have shown good historical numbers is Take Two Interactive and this is my analysis of the company.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
If you have read my previous post where I went through the numbers of the three largest American video game developers, you would know that Take Two Interactive is a company that should be analyzed further, as numbers show that both Take Two Interactive and Electronic Arts are interesting companies. I have looked at both companies and will share my analysis and calculation of where I would buy Take Two Interactive here, while Electronic Arts will not be shared at my blog but will reward my copiers at eToro.
Take Take Interactive is an American video game company that was founded in 1993. The company owns two major publishing labels being Rockstar Games and 2K. The most known franchises of Take Two Interactive are Grand Theft Auto, Read Dead and NBA 2K. These franchises are what gives Take Two Interactive their moat. I would definitely argue that especially Grand Theft Auto and Read Dead are such well known franchises that they can be considered to have a brand moat. Grand Theft Auto V is the 2nd best selling game ever, while Red Dead Redemption 2 is the 13th best selling game ever. Three other versions of Grand Theft Auto are also among the 50th best selling games ever. NBA 2K is certainly also a popular game and in 2019 Take Two Interactive agreed on a 7 years $1,1 billion contract with the NBA in order to be permitted to continue making the game. Hence, I would argue that NBA 2K has a brand moat as well, and in contrast to the other franchises, this game will be published in a new version every year. Unfortunately the large contract with NBA doesn't give NBA 2K a secret moat, as Electronic Arts also publish a NBA game called NBA Live.
Their CEO is Strauss Zelnick. He became the CEO in 2007 due to an investor staged take over, and is now the chairman, the CEO and the largest single shareholder of Take Two Interactive. He has a MBA from Harvard Business School and a JD from Harvard Law School. Before being involved in Take Take Two Interactive he has been a CEO in BMG Entertainment and 20th Century Fox. He is also the founder and chairman of ZMC, which is a private equity investment firm that specializes in leveraged buyouts and growth capital. Back in 2007 just before Strauss Zelnick became the CEO, Take Two Interactive had an annual loss just under $200 million and their prior CEO had pleaded guilty in falsifying records, while it is now a $2 billion company with no debt. Once he was in charge, he quickly focused on recruiting talent and had great visions of incorporating rich characters and evolving stories into the games, which is something that is very apparent in their games today. As a manager he is described to be someone that very good at identifying talent and is known for his accessibility and responsiveness. Needless to say that Strauss Zelnick is a great manager and he certainly has the credentials and results to show it.
We have determined that Take Two Interactive has a brand moat. We really do like the management as well. Now let us look into the big five numbers in order to see if Take Two Interactive lives up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first and most important number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all of the benchmarks. The numbers of Take Two Interactive do not live up to all of the requirements. However, we do see that the numbers are steadily increasing and we also have to keep in mind where Take Two Interactive were back in 2007 prior to Strauss Zelnick becoming the CEO. Meaning that even though the requirements are not met in the oldest benchmarks, it wouldn't keep me from investing in Take Two Interactive.
The next numbers we will look into are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. The numbers are somewhat of a mixed bag. I'm quite surprised that the number from last year is a nit underwhelming when we had a pandemic going on. Nevertheless, overall the numbers look good.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. Despite missing on one of the older benchmarks, the numbers look fantastic. Especially in the latest benchmark the numbers are fantastic.
The Equity Growth Rate in all benchmarks looks great. According to Phil Town this is the most important of the growth rates. It is encouraging to see that Take Two is delivering such fantastic numbers well above the requirements in all of the benchmark. These numbers should make current and potential investors very happy.
Finally we look into the Cash Growth Rates. One of the older benchmarks is underwhelming but it certainly shouldn't keep you from investing in Take Two. The deliver in all of the other benchmarks, and it is encouraging to see numbers like these, if you considering investing in the company.
To shortly summarize the five numbers from Take Two Interactive. The most important number is the ROIC, which underperformed in the oldest benchmarks but have increased steadily over time. Looking at Sales Growth Rate, EPS Growth Rate, Equity Growth Rate and Cash Growth Rate the numbers overall look great. You do have some underwhelming benchmarks along the way but this is far from being concerning. I believe that if you can find a company that has delivered the numbers Take Two has you should be happy to invest in it. Especially because the latest benchmarks in general look good.
Another important thing to look into is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. However, it is not something that you need to do on Take Two Interactive, as we previously wrote, they have no debt.
Based on the moat, management, numbers and debt, Take Two Interactive looks to be a great company to invest in. However, all investments have some risks and so do Take Two Interactive. According to their annual report one risk factor is that Grand Theft Auto, Red Dead and NBA 2K account for a substantial portion of their revenue, meaning that these franchises need to continue to perform. Another risk they mention is development risks, as they need to keep developing new products to gain market shares. Another factor they mention is the Covid-19 pandemic. While the lockdowns has been good for a business like Take Two Interactive, the economic consequences of the pandemic might mean that people would use less money on video games in order to make sure that they can get their essentials.
All right, we have gone through the numbers and risks regarding Take Two Interactive, and now it is time for us to calculate a price for Take Two Interactive. In order to calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use a EPS as it was in 2020 at 3,48. I chose a Estimated future EPS growth rate of 10 (which I believe is sustainable for now), Estimated future PE 20 (which the double of the growth rate, as the historically PE for Take Two Interactive has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY", we come up with the sticker price (some call it fair value or intrinsic value) of $44,62, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Take Two Interactive at price of $22,31 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". In order to do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating Cash Flow last year was 912,32. The Capital Expenditures was 68,92. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I wasn't able to find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 48,244 in our further calculations. The Tax Provision was 88,93. We have 116,17 outstanding shares. Hence, the calculation will be like this: (912,32 - 48,244 + 88,93) / 116,17 x 10 = $82,04 in TEN CAP price.
The last calculation is the PAYBACK TIME. It is also described in "MY STRATEGY". With the Free Cash Flow Per Share at 7,81 and a growth rate of 10 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $98,25.
I believe that Take Two Interactive is a great company with a great management. I see them performing well in the future due to their franchises and it seems like they know how to deal with their risks. I have great confident in the management as well, meaning that I would definitely open a position if Take Two Interactive hits the PAYBACK TIME price at $98,25.
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