Take-Two Interactive (Nasdaq: TTWO) has been in the Montaka portfolio since inception and continues to grow strongly. Below are five key points that highlight the Montaka team’s thinking on why TTWO is a quality stock with attractive growth prospects.
1. The model is changing and TTWO benefits
TTWO is at the forefront of the structural change in the video game industry, moving from a model that traditionally relied on one-off video game purchases, to one that now uses games as a platform to develop additional content that can maximize gamer engagement and monetization. This additional content is referred to as recurrent consumer spend (‘RCS’) and includes things such as virtual currency, additional downloadable content, and an assortment of other items that can be purchased in-game.
RCS revenues have attractive economics, given the very high incremental margin earned on these revenue streams. For example, the incremental cost of selling a gamer more virtual currency is essentially zero, and all this revenue falls through to the bottom line. Some of the other impacts of this model shift are more nuanced, such as the possibilities it creates in keeping gamers interested.
Using a game as a platform allows TTWO to release new content to refresh interest in the game and avoid “franchise fatigue”. The Company released two new free downloadable content updates for Grand Theft Auto (Bikers and Cunning Stunts) in the most recent fiscal quarter, driving year-over-year bookings growth for Grand Theft Auto Online, even though it has been more than three years after the initial release of the game.
2. TTWO has arguably the highest quality video game content available
Franchises such as Grand Theft Auto and Red Dead Redemption are highly-acclaimed. This is important given that: (i) only high quality content has genuine potential to be generate RCS, as consumers typically do not spend meaningful amounts on in-game purchases for middling-quality video games; and (ii) blockbuster games have the power to reignite the interests of “latent gamers”. Latent gamers refer to gamers that may have had a history of playing video games as children and teenagers, but have since aged and grown out of playing games on a regular basis.
High quality, enduring franchises such as Grand Theft Auto have the power to create such a buzz that these latent gamers re-emerge and purchase the game. Only sufficiently high-quality content can achieve this.
3. TTWO is great at developing new franchises organically
TTWO has demonstrated a continued ability to develop high quality content and to bring out new franchises which diversify their game portfolio. Prior to Strauss Zelnick taking the helm as CEO, TTWO was a “one-hit-wonder” with the Company’s fate tied overwhelmingly to the success of each Grand Theft Auto release. The company has since undergone a transformation and has added 8 new franchises since 2007. This has had the added benefit of smoothing out revenue and earnings volatility, given that GTA titles are typically released at 4-6 year intervals.
The Company also has a strong pipeline for growth, given the recent announcement of Red Dead Redemption 2 (‘RDR 2’) which is set to be released in Fall 2017. Management noted in the Q2 2017 earnings call that RDR 2 will have a “brand new online multiplayer experience”, a development with obvious potential for RCS opportunities that will support future growth.
4. High quality management team with aligned interests
Strauss Zelnick, the Chairman and CEO of TTWO, is an experienced media executive and has had a long tenure with the Company, having become Chairman of Take-Two in March 2007 and CEO in January 2011. Zelnick and has management team have done an excellent job in pivoting the company towards growth areas such as RCS, as well as maintaining an overarching focus on developing high quality content.
Zelnick owns over $60m worth of TTWO stock, and other TTWO executives have significant shareholdings in the Company. This creates an alignment between the interests of management and shareholders, and we look highly upon company executives that have “skin in the game”.
5. New platforms create new possibilities
TTWO’s management team have repeatedly commented that the Company is “platform-agnostic”; TTWO will develop content for wherever consumers choose to consume that content. New platforms such as virtual reality and augmented reality create exciting new opportunities to push the boundaries of gaming experiences. It is early days but TTWO is exploring this avenue with the upcoming release of Carnival Games VR, the Company’s first virtual reality offering which will be released on the Oculus Rift.
TTWO recently reported a very strong second fiscal quarter result, reflecting the benefits the Company is deriving from some of the factors discussed above. TTWO beat consensus estimates on revenues and earnings, and upgraded its FY17 revenue and bookings guidance. The stock was up almost 8% in the trading session after the result was released, and below is a chart showing TTWO’s share price performance since 1 July, 2015, the inception date of the Montaka Global Fund.
Source: Bloomberg
Montaka owns shares in Take-Two Interactive (Nasdaq: TTWO)
George Hadjia is a Research Analyst with Montgomery Global Investment Management. To learn more about Montaka, please call +612 7202 0100.
