The Take-Two Interactive Software Inc (O:TTWO) bears are eating some humble pie, especially following the recent rally in TTWO stock. And I suspect they’ll be having a second serving.
Over the past few years, the technology sector has been dominated by momentum buying of the big-name Internet stocks, such as Facebook Inc (O:FB), Netflix (O:NFLX) and Alphabet Inc C (O:GOOG), to list just a couple.
While these momentum technology stocks will likely continue to attract attention on both Wall Street and Main Street, there are other areas of the technology sector that offer tremendous upside potential, such as the console and online gaming segment.
We have all likely spent hours playing games, whether it’s something on Microsoft’s (O:MSFT) “Xbox” or Sony's (N:SNE) “PlayStation” (the “Wii” by Nintendo is dying a slow death).
The gaming technology sector is a multibillion-dollar annual business and is driven by the launching of new consoles and games.
It’s a tough business that can easily reverse course for a game developer if a new game fails to gain traction or explode upwards on a massive hit, including extremely successful franchises, such as Call of Duty, Grand Theft Auto, or a multitude of sports games.
The Players
The top players, which many of you are likely familiar with or at least heard of, are Electronic Arts Inc. (NYSE:O:EA) and Activision Blizzard, Inc. (NASDAQ:O:ATVI), which makes Call of Duty.
A much smaller but strong growth play in the gaming technology sector that has been attracting the attention of Wall Street is Take-Two Interactive Software, Inc.
Armed with a market valuation of approximately $3.0 billion, TTWO stock pales in size compared to the two market leaders, yet institutional investors Vanguard and BlackRock are the stock’s two top holders, with each having a more than six-percent stake. (Source: “TTWO Major Holders,” Yahoo! Finance, September 19, 2016.)
And as is the case with the top players, TTWO is known for its top-selling franchise, Grand Theft Auto, which is currently in its fifth installment with more than 60 million copies sold. The game has sold hundreds of millions since its initial launch in 1997.
The price action of TTWO has historically traded with the launching of new versions of Grand Theft Auto, which is generally still the case. However, the company has been working on diversifying its titles in order to smooth out its revenue stream.
Chart courtesy of www.StockCharts.com
The strategy is financially working, as the company now sells the NBA 2K basketball series—the best and top-selling basketball game on the market right now. If you want to know how it feels to play like LeBron James or Stephen Curry, you have to try the game.
In December, the company’s NBA 2K16 was the top-selling sports game.
Also in its gaming arsenal is the WWE 2K wrestling franchise and newer titles such as Mafia and Borderlands.
My Winner in the Gaming Space
The success of NBA 2K and the encouraging results among TTWO stock’s other titles should help to diversify Take-Two’s revenue in the years between the release of new versions of Grand Theft Auto. There is no indication as to when Grand Theft Auto VI will debut, but based on the five-year or so gap between past versions, we could see the next installment surface in 2018.
Take-Two has consistently turned in strong results, beating the consensus in four straight quarters. The company’s recently reported third-quarter results saw the company beat earnings per share by a whopping $0.39 per diluted share on a revenue beat.
TTWO stock’s balance sheet is strong, with net cash of more than $700 million at the end of December.
Yet with the rise in TTWO stock’s share price, we continue to see traders bet against the company. Having said that, even this action is declining. The number of shorted stocks fell from 13.34 million a month earlier to 12.66 million, or 15.04% of the float, as of January 29.
I’m not sure if I would bet against TTWO stock, especially with the success of NBA 2K and the continued global following for Grand Theft Auto.