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“The key thing is engagement, I can invest in addiction, and once you get one of these key franchises, the player is addicted, & once they are addicted they buy it again and again and again. The $60 that I think he is going to charge for the GTA now only gets you into the sideshow, you still have to buy digital content to see the flame thrower and the sword swallower.  The digital content has extremely high incremental margins, something like 80% incremental margins.” – Lawrence Haverty, Bloomberg 2013

TTWO is currently my favorite idea, for full transparency I’ve sized it accordingly in my PA (c.a. 30%). My main focus in this pitch is the big upcoming catalyst in the next 12-18 months, and that is the release of Grand Theft Auto 6 (GTA 6), and the multi-year cadence from the GTA6 platform and ancillary products. For a good background on positive secular trends in video games, consolidation, and specifics on Take-Two’s business please reference a good overview from leob710.

The overall thesis here is pretty simple: the core engine of the Grand Theft Auto (GTA) series has not been updated in what will likely be 12-13 years, depending on the exact release date. Top AAA titles have rarely ever waited so long for a subsequent release, while GTA 5 & GTA online have had online updates, its core engine has not seen a reboot.

“We're seeking perfection, and when we feel we've optimized creatively, that's the time to release. There is inherent tension, potentially, between getting something to market and creating perfection. But this company errs on the side of perfection.” - Strauss Zelnick Q3 ‘24 GTA 6 comments

This is a fairly fluid opportunity given the stock has recently re-rated almost -11% off the recent highs as of Friday afternoon. On the most recent Q3 ‘24 call, CEO Strauss Zelnick, provided very conservative guidance for 2025 (ending 03/31/25) ~ $7B, prior guidance had been ~ $8B. The majority of the delta was the timing of the release window (a title moving out of Q4 ‘25), lower than expected mobile advertising for NBA 2K 24, & additional costs associated with Match Factory. This is giving investors a time arbitrage opportunity to get in on weakness prior to the release of the biggest gaming title ever, likely in 12-18 months. We think with the full release of GTA 6 & some renewed growth from Zynga in the next few years, TTWO is capable of doing $12-15 in EPS per share with a high teens to low 20s multiple ($225-$300 pps). We also think there is the very real possibility that the stock gets a significantly higher multiple due to all the hype around GTA 6, and some of the “animal spirits” that have been prevalent in AI stocks. Also noteworthy is the year in which GTA 5 was released, the stock was up +54% vs. an SPX Index that was up only +20%.

This is really an unprecedented span between updates, especially considering the current popularity of GTA5. Prior to GTA 5 the game had a much quicker core engine update and timing release of only 5 years from GTA 4’s release. GTA 5’s success has been tremendous; it has sold over its lifetime 195m copies, making it one of the biggest releases ever in video game history. To put things into perspective, on a unit basis, the only video games that have outsold GTA 5 in the entire history of video games are Tetris – 520m units (#1), and Minecraft (300m+; #2). On a gross adjusted sales basis, I believe that GTA 5 is very close to the best-selling game all-time when accounting for the higher per unit price (and in game sales) relative to Tetris and Minecraft.

What amazes me with GTA 5, at over a decade old, is consistently the number one streamed game on Twitch. On the PC (GTA 5 was released on 04/15) and the Steam records indicate that it recently hit an all-time high in engagement (excluding first month of release) with the excitement of the GTA6 trailer. TwitchTracker also showed large gains in viewership, +69% YY in Nov. & +59% in Dec. and average Steam players +37% YY in Dec.

Friday Evening 02/17/24 (11pm; GTA 138K viewers, #1 on Twitch)

Source: Steamcharts

Zelnick the Sandbagger:

Zelnick has a history of lowering the bar to get very low expectations baked into the stock, and then delivers a fairly consistent set of beats and raises subsequent to the re-rating. With Zelnick recently lowering his view of ‘25E sales by about $1B less than prior expectations it seems that he may be at it again, especially in light of the upcoming GTA 6 release.  Going all the way back to prior to the GTA 5 release in FY ’13 he lowered EPS, and then again coming into FY 2014 (ending 03/31/14), lowers first full year of GTA 5 sales.

Revenue guidance for FY 2014 was $1.8B w/ a corresponding EPS of ~ $2.18. FY ’14 actual results were $2.414B, and $4.26 in EPS.

The sales guidance was only sandbagged by about 34% on the year, but EPS came in at essentially 2x of what management guided. Talk about conservative! I think I’ve seen this movie before Strauss, and it’s called UPOD. In all seriousness, Strauss knows the AAA title cadence and wants to position guidance well below even a conservative approach to have a more linear beat and raise flow. Management is fairly notorious for setting early guidance at conservative levels and then getting a multiple expansion into the major releases. JP Morgan even warned investors to be wary of conservative guidance prior to a GTA 6 release, and prior to the most recent lowered guidance.

“Though Take-Two shares are trading close to 52-week highs, we continue to see upside, with history indicating management setting early guidance at conservative levels and multiple expansion into major releases. Delays to GTA VI remain a risk – both GTA V and RDR2 were pushed back from original timing – though we think investors are largely valuing the stock on F26, and therefore we see limited impact in the scenario of a six-month push-back (e.g., from early 2025 to the fall of that year).” – JP Morgan 01/29/2024 

Margins Trending Higher with RCS:

To give an example of the enormous, fixed cost leverage of this business, prior to a AAA release title, the financials typically include a lot of capitalized and other expenses. For example, the 3 years prior (2011-2013) to the release of GTA 5, Take-Two had lost an average of around -$30m per year. Conversely, in the first year of the release with GTA 5 it produced approximately $670m in FCF, a massive inflection point for the overall business. This eclipsed any prior annual FCF for this business by about 6x. In addition, annual adj. EBITDA margins hit an all-time high in 2014 of 30%.

Over time as this business has scaled and introduced more recurring revenue sales, aka recurrent consumer spending (RCS), which over time has become significantly more important to the AAA title releases. We estimate that RCS is roughly $600-800m per year from service packs, in-game purchases, upgrades in additional content from the GTA franchise, post release of GTA 6, RCS will likely be north of $1.2-1.4B, with very high incremental margins.

Other AAA Comparable Titles:

To give some overall perspective on valuation from an individual AAA hit, privately held EPIC Games, just a few days ago had an investment from Disney that valued EPIC at $22.5 billion. The real value of EPIC is almost entirely focused on their mega-hit Fortnite and to some extent their Unreal Gaming Engine; they've had limited success with other titles. According to a Forbes article in late 2023, Epic Games was booking about $100m in other gaming revenue vs. a total of $5.6B in total revenue, so approximately 97% of total sales were from Fortnite.

Fortnite also peaked in total worldwide interest according to Google trends since July of 2018. Clearly the game has been on a downward trajectory as far as engagement since the peak hysteria in 2018 after the fall 2017 release. EPIC Games peak valuation was $31.5B in April of 2022, with a $2B investment from Lego Group & Sony Group. Presumably the brand was still growing to some extent in early 2022, it since then has appeared to decelerate or have even declined given the pretty massive down round from Disney. While not completely apples-to-apples in a comparison to GTA 5/6, given Fortnite is a free-to-play (FTP) game, we think the big insight here is these games should be about the same in size from a gross revenue perspective. One can plug and play their own numbers for the individual valuation of Fortnite ($15-20B?), but we think that GTA 6 has the chance of becoming an even bigger total grossing game given the massive success of GTA 5 and the franchise value & ecosystem of GTA. We believe that the individual franchise value of GTA could be as high as $20-25B+, and possibly higher given what is likely to be the biggest gaming release ever. This is relative to a company EV of $29B with other significant premier AAA titles including NBA 2K (140m units), Red Dead Redemption (81m+ units), Borderlands (77m units), Bioshock (41m units), Civilizations (69m units), WWE 2K, MaxPayne, and a significant amount of mobile hits from Zynga. Regarding Zynga, obviously this is the one big misstep from Zelnick regarding capital allocation, but even if Zynga is worth half the purchase price, say ~ $6B, there is still substantial embedded value there. Zynga has been the red headed step-child of Take-Two’s business, it has delivered well below expectations with the post pandemic deceleration lasting much longer than expected. Zynga has the opportunity to return to growth in 2025 & beyond, with a much better release slate and larger investments into what appears to be its next upcoming hit Match Factory (Top 30 on iOS; US & UK). 

How Big is GTA 6?:

To put some relative perspective on the excitement of GTA 6, they recently came out with a trailer 2 months ago, and within 24 hours it had almost 100m views. While just one data point, Fortnite’s cinematic launch trailer 6+ years ago garnered just 4.8m views. The GTA 5 trailer, to add some context, cumulatively for the past 11 years has had 108m views. The GTA 6 trailer was so successful it broke YouTube’s record for a 24-hour period in views from non-music video launch. The GTA 6 trailer currently has 175m views from the trailer posted 2 months ago. To get a sense of the cult like following of this franchise, here are a couple of the top comments pertaining to the new GTA 6 trailer:

Take-Two’s also has a recent partnership with Netflix, launching its legacy title GTA trilogy, and so far the game has been a resounding success.  Since GTA’s December 14, 2023, release date on Netflix it has been the most installed game (out of 77 gaming titles available) with the highest engagement on the subscription services gaming platform.

Pricing:

Based on our research and seeing many of the newer AAA released titles, we think GTA VI price point ends up at ~ $70, but obviously given the extreme wait and huge pent up demand we think there is the possibility it prices higher and/or potentially lower to get more in volumes. Below are some of the top AAA/top large releases and the corresponding price points:

Overwatch initial release price point $60, Console (2016)

Call of Duty Modern Warfare: $69.99, Console & PC (2019)

Diablo IV: $70, Console & PC (2023)

GTA V: $60, Console price (2013)

God of War: $60, Console (2018)

Assassin’s Creed: $60/$65, Console (2009)

Cyberpunk 2077: $60/$75, Console (2020)

GTA VI: Volume and Price Point Combinations

Overall, we think that sales are most likely in the 50m range to possibly a bit higher, so $3.5-$3.8B in gross unit sales in the first 12 months. Obviously another big needle mover are the ancillary in game sales which we think can easily add another $500-$1.2B in incrementally high margin revenues in the first year, depending on how it is structured in the game. We think given the success of this recurring revenue model with GTA 5 and GTA online that this will be a focal point post release.

The big standout now is the delta between 2024 Y Est.($5.3B) and 2025 Y Est. ($7.1B) is roughly $1.8B, whereas it was almost $2.8B prior to the most recent quarterly reset of expectations by Zelnick. I think this is clearly a big time sandbag for ‘25E, if one just pencils in 30m units in the first Q of the release (as a proxy GTA 5 did 29m), that would be an incremental $2.1B in unit sales at $70/unit. This doesn’t account for any other organic growth from the rest of TTWO’s business, nor does it include any in game RCS spending from GTA 6. Even if you adjust organic growth down to zero, and account for no incremental RCS spending, the quarter could still be $1B above expectations (if a full quarter of sales) and more likely +$500m above if middle of the Q release. Furthermore, consensus has the game being sold during calendar Q1 2015, but has only accounted for an incremental $1,2B YoY on the Q. GTA 5 for instance sold 16m copies in 5 days, so consensus is ridiculous low, and almost assuming that the GTA 6 will only be available for a few days in the first quarter of 2015.

Summary:

Take-Two Interactive's investment thesis centers on the enduring popularity and revenue potential of its flagship title, Grand Theft Auto (GTA). Despite GTA 5's age, its sustained dominance on platforms like Twitch, coupled with the recent engagement surge following the GTA 6 trailer, underscores the franchise's market strength. Take-Two's management strategy, marked by conservative revenue guidance and surpassing expectations, along with the growth of recurrent consumer spending (RCS), promises continued revenue growth, particularly post the release of GTA 6. This, combined with strategic partnerships such as the successful launch of GTA trilogy on Netflix, highlights the company's ability to leverage & market its legacy titles across various platforms and formats, ensuring sustained gamer interest and potential for long-term value creation.

Catalyst

GTA 6 release, potential acquisition target given the closing of Activision. TTWO and EA are really the only remaining scaled players left.