This Stock is Up 520% in 5 Years

It’s not exactly a household name. Were it not for its hit video game franchises — Red Dead Redemption and Grand Theft Auto — many investors likely wouldn’t have heard of Take-Two Interactive Software (NASDAQ:TTWO). But TTWO stock has been besting rivals and racking up investor gains for the last decade.

That’s unlikely to change in the coming 10 years as it takes on industry giants Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA).

The secret to Take-Two’s success? The company sticks with works and puts its management team on the same side of the table as investors. And, with the lines between different forms of entertainment continuing to blur, the next decade could be even better than the last.

Quality Over Quantity

TTWO is, at first glance, the same as any other video game developer. Some of its titles sell better than others, and every observer and gamer consistently asks “What’s next?”.

A closer inspection of Take-Two reveals a nuanced but critical difference between the New York City games maker and its peers: TTWO focuses on the quality of games rather than quantity, and it’s more likely to produce a sequel to a proven game concept than create a whole new concept.

Case in point: “Grand Theft Auto”. The franchise got its start way back in the late 90’s, and has since spawned four sequels with a fifth on the way.

Sequels in the video gaming industry aren’t unusual. What is unusual is to see a developer extract so much value from one franchise for so long. Take-Two does it because it can. “Grand Theft Auto 5”, released in 2017, was just as beloved as previous iterations were, selling a total of 90 million copies since its debut. Meanwhile, the online/multi-player version is still a draw.

By constantly updating game-play, Take-Two’s creation remains relevant in a sliver of the market that also includes popular online-play options like “Fortnite” and “Call of Duty”.

Its “Red Dead” lineup hasn’t seen as many follow-ups. In fact, the second one was only released last year, eight years after the first… an eternity within the gaming world, particularly considering how much coding could have been recycled. Take-Two wanted to get it not just right, however, but build it to ‘wow.’ It was even willing to delay its release to ensure perfection.

Strong sales of the game suggest it was time well spent, with 17 million copies purchased during its first two weeks of availability.

Don’t misread the message: Take-Two publishes new titles all the time. It hasn’t been afraid to go back to the same well though, when it knows gamers will buy more.

Management Incentive

Also unlike its rivals, Take-Two pays its leadership in a way that encourages smart tactics rather than ill-advised risks.

Actually, Take-Two doesn’t pay CEO Strauss Zelnick anything. He’s paid by his company, ZMC (originally known as ZelnickMedia), which is contracted by Take-Two to lead the company. ZMC’s compensation is closely linked to the performance of Take-Two stock and the game maker’s EBITDA though, which in turn motivates Zelnick to not just push hard, but also push smart.

When Zelnick says “I’m very devoted to the success of the enterprise,” he has to mean it. His paycheck entirely depends on it.

It’s an unusual arrangement to be sure, but one that’s paid dividends — even to investors who want the company to pick up the pace of new-game development. Over the past five years, TTWO stock has gained an impressive 520%. The next-nearest name in the industry is EA, with a 285% increase.

Looking Ahead for Take-Two Stock

Even as rival game makers are focused on the titles to be published this year for this year’s consoles, Zelnick and ZMC are eyeing the future in a much broader light.

He’s a self-proclaimed entertainer at heart — not a programmer. That may be why the company’s titles are often given accolades not just for being fun, but for being visually stunning and artistic, to boot.

In that vein, Zelnick sees opportunity beyond video gaming. Late last year he commented: “Can we properly think about deploying our balance sheet in addition to building our business organically, inorganically and might we touch other areas of the entertainment business in so doing? It’s a possibility.”

He offered no specifics, but, given that he’s the interim chairman of CBS (NYSE:CBS) and a former president of 20th Century Fox, it’s not a stretch to assume at least one of its game franchises could be adapted into a story suitable for a movie or television screen. A presence in the video world will help sell more video games, and vice versa.

Whatever lies ahead, for Take-Two and TTWO stock owners, there’s little doubt it’s going to be fun for investors to watch unfurl. That is, after all, what the company is best at.

— James Brumley

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Source: Investor Place