Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Is Take-Two Interactive Making Money?

Video-game stocks are hot because COVID-19 has many people trapped at home playing games.

For instance, Mr. Market paid $201.14 for Take-Two Interactive’s (TTWO) stock on 9 February 2021 and $199.82 on 10 February 2021. In contrast, Mr. Market paid $112.39 for Take-Two (TTWO) on 11 February 2020.

So what is Take-Two Interactive (TTWO) and why does Mr. Market love it? Take-Two or Take2 is a holding company that owns several popular game publishers including Rockstar Games, 2K, Pirate Division, Ghost Story, and Socialpoint.

Prominent Take2 titles include Grand Theft Auto, Borderlands3, NBA2K21, World Wrestling Entertainment (WWE) Battlegrounds, The Outer Worlds, Kerbal, and Red Dead Revolver. One of Take2’s specialties is issuing licensed games based on sports franchises.

Some of Take Two’s games are popular. Statista estimates that Grand Theft Auto V had 187,940 players on the Steam platform worldwide in January 2021. Grand Theft Auto’s Steam player base fell from a peak of 267,360 in February 2020.

Is Take-Two Growing?

I think people are buying Take2 (TTWO) and other gaming stocks because they want to get the money they or their kids spend on games back. When corovonavirus traps people at home, they play more games and buy game stocks.

Notably, Take2’s share price grew by $89.15 between 11 February 2020 and 9 February 2021. That growth coincides with the out-of-control COVID-19 pandemic in the United States and the United Kingdom coronavirus lockdowns all over the world.

Conversely, Take2’s revenues fell in 2020. Take-Two reported quarterly revenues of $930.13 million on 31 December 2019 that fell to $841.14 million on 30 September 2020.

 Does Take-Two Make Money?

Take2 (NASDAQ: TTWO) makes money. It reported a quarterly gross profit of $408.64 million and $115.37 million in quarterly operating income on 30 September 2020.

Those numbers fell from $493.04 million in quarterly gross profits and $176.83 million in quarterly operating income on 31 December 2019. Thus, Take Two made less money during the COVID-19 pandemic.

I think Take-Two made less money because many of its customers were not working or working less because of coronavirus. People had more time to play games, but less money to pay for them in 2020.

Particularly in the United States, where politicians refuse to provide cash relief to ordinary people. For example, the Australian government paid some citizens a $3,000 a month wage subsidy, the Tax Foundation estimates.

Meanwhile, the Danish government covered 90% of the wages of people unemployed by COVID and the Estonian government 70% of the unemployed’s wages. Plus, the United Kingdom made direct cash payments to the Unemployed that replaced 80% of average earnings.

However, US efforts comprised a clumsy unemployment insurance expansion and two cash stimulus payments of $1,200 and $600 for individuals. Hence, American gamers had less cash to buy games.

How Much Cash does Take-Two Generate?

Take2’s (TTWO) games generate some cash despite the pandemic. Take-Two reported an operating cash flow of $181.32 million on 30 September 2020.

Additionally, Take-Two reported a quarterly ending cash flow of $2.161 billion on 30 June 2020. The quarterly ending cash flow fell to -$76.49 million on 30 September 2020. Take-Two started 2020 with a $295.95 million quarterly operating cash flow and a $312 million quarterly ending cash flow on 31 December 2019.

On the positive side, I think Take-Two borrowed little money in 2020 because it only reported one financing cash flow of $730,000 on 31 December 2019.

Impressively, Take2 reported no long-term debt on 30 September 2020 and $153.51 million in long-term debt on 30 June 2020. Thus, Take-Two has cash and little debt.

What Value does Take-Two have?

Take-Two Interactive (NASDAQ: TTWO) had some value on 30 September 2020. However, I see nothing in Take2’s financial numbers that justifies the $199.82 Mr. Market paid for it on 10 February 2021.

For instance, Take2 had $2.836 billion in cash and short-term investments and $5.836 billion in Total Assets on 30 September 2020. Hence, there is some value in games.

I think Take2 is a poor stock because Mr. Market overprices it, pays no dividend and offers little growth potential. My advice for investors is to avoid Take-Two until starts paying a dividend.