Which Next Technology Stock Will Soar?

Summary:

Take-Two Interactive Software, Inc.(TTWO) is an American video game holding company. Take-Two Interactive was founded in September 1993 by Ryant Brant in New York City. The company had their initial public offering on April 25, 1997 on the NASDAQ exchange. The company owns several gaming studios such as Rockstar Games, 2K Games, and Private Division, as well as owning a 50 percent stake in the NBA 2K eSports League. Take-Two Interactive has become a global gaming brand since the ascension of game titles like Grand Theft Auto, Red Dead Redemption, Bioshock, Borderlands, and NBA 2K.

Grand Theft Auto 5's records include:

• Best-selling action-adventure video game in 24 hours
• Best-selling video game in 24 hours
• Fastest entertainment property to gross $1 billion
• Fastest video game to gross $1 billion
• Highest-grossing video game in 24 hours
• Highest revenue generated by an entertainment product in 24 hours
• Most viewed trailer for an action-adventure video game

While Grand Theft Auto is the focal point for Take-Two Interactive's gaming achievements, Red Dead Redemption and the 2K franchise are no slouches either. Red Dead Redemption sold a total of 15 million copies and its additional downloadable content "Nightmares" sold a total of 2 million copies, which is among the best-selling additional downloadable content. While the NBA 2K franchise has sustained a healthy audience of gamers throughout the years, with its recent iteration, NBA 2K18 being the highest-selling sports game of 2017. NBA 2K along with all sports games thrive on microtransactions. NBA 2K18 saw its microtransaction sales jump 57 percent year-over-year.

Catalysts:

The future for gaming is bright, especially for companies who are putting effort into the eSports industry. Take-Two Interactive plans on establishing a standalone business for its take on eSports, the NBA 2K league. However, the league is still in early stages with an average viewer base of only 10,000 viewers on Twitch, compared to 100,000 viewers for Activision Blizzard's Overwatch League. Take-Two Interactive already established connections with companies like Intel, Dell Technologies, New Era, and the National Basketball Association. These big companies see promise in the growing eSports league going into the future. This can be said by their investment while the league is so small in viewership. In order to transform the eSports league into a growth driver for Take-Two Interactive later down the line, the audience would have to grow significantly. In doing so, Take-Two Interactive can attract a variety of brands outside of gaming and basketball that aim to market their products directly toward the youth. Another endeavor Take-Two Interactive can strive for is to establish a connection with another media company such as Disney, Fox, or Comcast. By establishing this connection, the league would get more recognition and expand their audience to not only gamers, much like Overwatch's League did with ESPN.

Grand Theft Auto Online, continues to sustain a wide audience of fans even though the game came out in 2013. Rockstar studios have created a recipe for continued success as they incorporate several expansions over the course of the five years. Sales numbers for Grand Theft Auto Online appears to always surprise the streets and company's expectations since releasing. This success will continue in the future as Rockstar studios produce more content.

The biggest reason to be excited for the future of Take-Two Interactive would be the release of Red Dead Redemption 2. Fans of Rockstar studios have been waiting for this release for over eight years, with that being said Red Dead Redemption 2, is expected to be the best-selling game of the year. Take-Two Interactive's management has been playing down the release of this game, and just began heavily marketing it within 100 days of its release date. However, Take-Two Interactive has guided 2019 to be a record year for the company in terms of free cash flow and revenues.

Risks:

There is one glaring risk that can completely destroy the entire video game industry. That risk would be microtransactions going away due to either legal reasons or consumer boycott. Video games are heavily reliant on microtransactions in order to sustain growth. Video game's cost of production continues to rise as games are becoming more advanced in all aspects. However, the price to buy a base copy of the game has stayed the same for years. This model requires games to incorporate a microtransaction component to become profitable.

Gamers are not happy with the trend that gaming is going in, because most games establish a system that is not fair, which is typically phrased "pay to win." This system would give an advantage to a player based on the amount of money they spent on the game rather than skill. The most famous example of this is Electronic Art's Star Wars Battlefront 2. Electronic Art's newest title had high expectations and the release of this game was riddled with microtransactions that made the game significantly worse. Gamers were set with a dilemma of whether to grind tens of hours in the game in order to be able to play with Star War's famous characters or spend a few dollars. On top of that, the characters had certain advantages over the base characters and made the game unfair.

The NBA 2K franchise is taking right after the approach that Electronic Art has implemented. In almost every single game mode in the newest NBA 2K, a form of microtransaction exists and was heavily influenced. This problem hasn't gone unnoticed however, Take-Two Interactive, has stated to be ramping back microtransactions in the newest installment of the NBA 2K Franchise. This will most likely win back fans and keep that healthy group of gamers that got NBA 2K18 to the top of the charts in sales, still there for years to come.

Another possible risk would be the field is too crowded upon the release of Red Dead Redemption 2. With the likes of Call of Duty Black Ops 4 and Battlefield 5, all coming out this holiday season it is a possibility that Red Dead Redemption's newest installment can be overlooked. Although, gamers have shown frustration with all the other franchises because of greediness. Both Call of Duty and Battlefield have been exploiting their fans with a heavy incorporation of microtransactions that already has fans angry. On top of that, both of these franchises are bringing a battle royale mode to their games. In many gamers eyes, this is a money grab and is not needed to be a successful game. In the case of Call of Duty's newest game, the studio decided to take out the single player aspect from the game totally in order to focus on the battle royale mode. Although most fans find the single player experience lackluster, it still adds value and has potential to be great if studios devote quality time. But, publisher Activision Blizzard sees adding the battle royale mode to be a growth driver and add to the lifespan of the game.

Opinion:

As a gaming enthusiast and being heavily involved with the community I am able to understand the current trends of the field. I believe that the battle royale craze has already peaked. This can be shown by viewership of Fortnite falling on Twitch month-over-month for the first time in June. I view Call of Duty's and Battlefield's effort in the space as a waste of resources when they should be innovating in other ways.

The whole space can also see the excitement in terms of mergers and acquisitions, with media companies trying to find new growth, gaming can be a fantastic source. I think you can't go wrong owning any of the top three gaming stocks. However, I believe Take-Two Interactive is the best of the three, with catalysts able to propel growth for decades to come.

Sources:

https://www.barrons.com/articles/fortnite-does-twitch-viewership-hint-at-declining-interest-1531747948

https://www.fool.com/investing/2018/07/31/3-reasons-take-two-interactive-stock-could-fall.aspx

http://ir.take2games.com/phoenix.zhtml?c=86428&p=irol-govHighlights

https://www.fairfieldcurrent.com/2018/08/01/take-two-interactive-software-inc-common-stock-ttwo-scheduled-to-post-earnings-on-thursday.html

Disclosure*

I am an owner of Take-Two Interactive and Activision Blizzard stock