Smart investors have a knack for picking up promising companies early. After all, every $50 billion company was once a $5 billion one.
Take-Two Interactive Software (TTWO - Get Report) , which has produced popular game franchises such as Grand Theft Auto, Red Dead Redemption, Borderlands and NBA2K, may be the next Activision Blizzard (ATVI - Get Report) or Electronic Arts (EA - Get Report) .
Take-Two deserves a place in your growth portfolio given the company's nearly $1.5 billion of annual sales, a solid balance sheet and a robust pipeline of online and social games.
Take-Two, which publishes products through wholly owned labels Rockstar Games and 2K, is an emerging company with its share of positives and negatives.
The positives include brand power and products that have developed a strong following among gamers across many platforms. GTA, RDR and NBA2K have turned out to be big successes. Gamers are eagerly waiting for more from the company.
Digital sales for the company contribute to more than 60% of revenue. The introduction of online games has enhanced their stickiness and improved playing times, while also bringing in additional sales via in-game purchases.
Take-Two, while being a latecomer to the burgeoning eSports space, also has struck the right notes. An NBA2K eSports League, centered on the company's NBA2K franchise, will launch in 2018.
In 2015, both Activision and Electronic Arts launched competitive gaming subsidiaries.
Take-Two also has entered into the social gaming space. Its $250 million purchase of Social Point, famous for Dragon City and Monster Legends, will place Take-Two among the leading 20 mobile game developers.
The deal, when integrated, will bring the company competencies in mobile gaming, which could find application in other Take-Two franchises. This should help drive both operating cash flow and earnings per share in fiscal 2018.
Together with online sales, social gaming is extremely important for game publishers as dollar spending growth remains sluggish across the industry even with the release of new console versions by Microsoft's (MSFT - Get Report) Xbox and Sony's (SNE - Get Report) PlayStation.
In the short-term, Take-Two's game pipeline looks promising. The release of Mafia 3, Civilization VI and WWE 2K17 will surely provide a boost to the company. Red Dead Redemption 2 is expected to do as well, if not better, than the first version of the cowboy game.
Take-Two, though, isn't a powerful cash generating business yet. With $1.5 billion in annual revenue, we project the company is still 10 to 15 years away from becoming an Activision Blizzard or Electronic Arts.
In addition, video game development and publishing is a capital-intensive business. With Take-Two needing between $500 million and $900 million annually in working capital, investors wanting a more mature business may not be comfortable.
Finally, the company's stock already has been on a solid run. The stock price has grown fivefold from $11 per share in 2013 to more than $58 today. Double-digit returns over the past four years and an 18% rise so far this year are attractive, but skittish investors might just book profits if there is any disappointment.
Nevertheless, analysts project Take-Two to post growth of more than 14% in EPS annually over the next five years. The projected run rate is just a tad lower than ATVI and EA.
Trading at 20.6 times forward earnings, Take-Two's stock valuation is in line with those of Electronic Arts and Activision. This indicates the company is a great long-term bet for investors with the potential for a huge payoff.
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