Under the Spotlight Wall St: Take-Two Interactive Designs, Inc (TTWO)

Take-Two ($TTWO) is a leading publisher of interactive entertainment, having enjoyed a long and successful run in the volatile video game industry. Boasting iconic franchises like Grand Theft Auto, Red Dead Redemption and NBA 2K, the company has weathered market cycles and adapted to evolving trends.

Founded in 1993 by the then-21-year-old Ryan Brant, the company started as a low-cost publisher, releasing budget-priced PC titles and gradually building its portfolio. Brant’s initial strategy involved investing in well-known actors for live-action games, a novel concept at the time. Titles like The Daedalus Encounter and Hell: A Cyberpunk Thriller, featuring Hollywood stars Tia Carrere and Dennis Hopper respectively, achieved moderate success, establishing Take-Two's presence in the market.

Recognising the limitations of developing games as a sole studio, Take-Two embarked on a series of acquisitions in the late 1990s. This aggressive expansion strategy saw the firm acquire distribution companies, studios like DMA Design (later renamed Rockstar Games), and the rights to popular franchises like Dark Colony and Jeopardy!. BMG Interactive was another important acquisition, which provided Take-Two with a European sales and distribution network.

Game changer

In 1997, the company achieved unprecedented success with the release of Grand Theft Auto (GTA), initially developed by DMA Design. The game, in which players impersonate a mobster wreaking havoc on fictional cities, became a surprise hit (in spite of the controversy it sparked due to its violence) and laid the foundation for the firm's future prosperity.

GTA’s success granted it sequels, with GTA 2 coming out in 1999 and GTA III, the first 3D game of the series, coming out in 2001. The 3D graphics of GTA III made the violence and criminal behaviour of the game’s protagonist feel even more real, sparking significant backlash in the media and among parents worldwide. Nonetheless, the game was a huge success, selling more than 14 million copies and cementing Take-Two and Rockstar as serious players in the gaming industry.

The next instalments of the series, GTA: Vice City, launched in 2002 in fictional Miami, and GTA: San Andreas, launched in 2004 in a city resembling Los Angeles, further fuelled the game’s popularity. Vice City sold 17.5 million copies and San Andreas was an even bigger success, selling 27.5 million.

Expanding the playing field

In spite of the huge success of the GTA franchise, Take-Two sought to develop different product lines. In 2005, the company established the 2K label, focusing on sports titles and other non-Rockstar franchises. This strategic move aimed to diversify the firm’s portfolio beyond the controversial GTA series.

However, challenges persisted. The loss of the exclusive NFL rights to Electronic Arts ($EA) impacted the sports segment, while internal management issues led to Brant's departure. The company faced further scrutiny for financial reporting discrepancies, culminating in a US$7.5m fine.

A turning point came in 2007 with the successful takeover of the company by Strauss Zelnick. This leadership change ushered in a new era of stability and a focus on long-term profitability. Restructuring within the business followed, including the establishment of 2K Play for family-friendly titles. Take-Two also navigated a hostile takeover attempt by Electronic Arts in 2008, demonstrating its resilience.

This period also saw the release of critically acclaimed titles like sci-fi action role-playing game BioShock and the western-themed open world shooter game Red Dead Redemption, solidifying Take-Two's reputation for high-quality products. The company also nurtured its internal studios, expanding Rockstar’s portfolio.

Playing to win

The year 2013 was pivotal for Take-Two, with the landmark release of GTA V. The game became one of the highest selling of all time, with over 185 million copies bought worldwide. This success fuelled financial stability for the company and allowed for further strategic investments. Take-Two established Private Division, a subsidiary firm dedicated to publishing mid-sized independent games, in 2017. This move aimed to capture a new segment of the market and broaden Take-Two's reach. Furthermore, the launch of the NBA 2K League in the same year marked a foray into eSports, reflecting Take-Two's understanding of the growing importance of competitive gaming.

The release of Red Dead Redemption II in 2018 was another commercial success, solidifying the company's position as a leader in narrative-driven gaming experiences.

Going mobile

Perhaps the most important decision Take-Two has made in recent times was the acquisition of the mobile gaming giant Zynga. Bought in 2022 for US$12.7b, it was the second-biggest merger in the gaming industry ever. With games like Empires & Puzzles, Merge Dragons! and Zynga Poker, the game studio allowed Take-Two to expand into mobile, the fastest growing gaming niche.

Though the acquisition may be recent, it already plays a huge part in Take-Two’s earnings. Out of the US$1.34b in revenue it reported in Q4 2023, US$697.9m came from mobile platforms. Mobile games are also known for having more recurrent purchases than console games, and that’s also shown in Take-Two’s earnings. Recurring sales, such as in-game transactions, made up 78.1% of its revenue in 2023, up from 64.8% in 2022, when Zynga was still in the process of integration within the company.

Looking forward

Gaming is already the biggest entertainment industry in the world, and Take-Two expects it to grow even further, projecting a total addressable market of US$235b by 2027, with mobile holding the lion’s share of it. But if Zynga has a sizable market share in mobile gaming, it’s still far from being the number one, with Microsoft’s ($MSFT) mobile studio King dominating through its moneymaker Candy Crush.

Being one of the leaders in mobile gaming is not something that can be taken for granted. With more than 490,000 games available in Google’s Play Store and more than 200,000 in Apple’s App Store, competition is fierce and the barriers to entry are slim. Furthermore, revenue earned through such platforms can be subject to revisions, as per Epic Games’ lawsuit against Apple.

However, 2024 seems set to be a productive year for Take-Two’s mobile division, as it is likely to benefit from the launch of the remake of the original GTA trilogy in December 2023, as well as the release of Game of Thrones and Star Wars-themed games.

On the console front, NBA 2K is one of the most important franchises for recurring sales, with a new edition coming out every year. However, other than that, the company lacks any major new games for 2024, which could potentially generate significant headwinds in the short term. This has been indicated by Take-Two’s revenue guidance for the year, expected to be in the US$5.25b - US$5.3b range, down from US$5.48b.

In 2025, Rockstar is expected to launch the long awaited GTA VI. With the franchise having sold more than 405 million copies throughout all of its instalments, and with GTA VI’s trailer collecting more than 176 million views on YouTube, the game is expected to drive significant revenue. But if fans aren’t pleased, Take-Two’s stock could possibly suffer a decline more violent than anything that’s ever been seen in one of its games.

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.