Streetwise for Friday, January 5, 2018

The preamble is always the same, the promotion of minimal risk and exalted returns; but for whom? Naivety by the average investor often leads to an unrestrained contagion of euphoria resulting in carnage of the gullible and a decimation of investment expectations.

Yet, the premise that quality companies will see enhanced shareholder valuations under the codicil of rising dividends and increased retained earnings remains valid. Consider Take-Two Interactive Software (TTWO), a leading developer, publisher and marketer of interactive entertainment.

The Company develops and publishes products principally through its two wholly-owned labels Rockstar Games and 2K. Their products are designed for console systems and personal computers, including smartphones and tablets, and are delivered through physical retail, digital download, online platforms and cloud streaming services.

Entertainment has become digital and gaming companies are achieving gross margins never possible in the 1990s as digital downloads and recurring revenues increase profitability.

The main engine over the past year for Take-Two has been Grand Theft Auto V, which recently became the bestselling video game of all time. CEO Strauss Zelnick indicated on the companyís third quarter earnings call that “Öthe title has achieved 42 top 10 chart appearances during the 50 months since its release, the most by any single title in reported history.”

Although the game has a huge fanbase, it continues to grow as a new generation consoles continue to see adoption at lower price points. This results in rising cash flow even though the game is several years old. Take Two now believes that Fiscal 2018 (Calendar April 2017 to April 2018) will again show increased revenue over the previous fiscal year.

Take-Twoís subsidiary, Rockstar Games, will take the lessons learned building Grand Theft Auto and transfer them to Red Dead Redemption 2 giving Take-Two the potential for a blockbuster series going forward, as well as continuing revenue growth and margin expansion.

NBA 2K18 was the big hit of the third quarter, with 20 percent growth over last year. It is the first NBA game on a Nintendo console since 2013 with consumer spending on NBA 2K18 rising 57 percent over third quarter 2016.

Recurrent consumer spending is the endgame and here Take-Two was up 84 percent year over year to reach 42 percent of total net sales for the quarter.

The difference in operating results between 2016 and 2019ís guidance, reveals a dramatic increase in the higher margin digital component of the business and in turn increased operating income.

Unfortunately, Wall Street was expecting a more bullish outlook for Fiscal 2019. Although Take-Two did not update its guidance that could come in the next 2 quarters with additional upside for the shares if Take-Two posts about a 50 percent increase in digitally delivered revenues from Grand Theft Auto, 2K sports titles and Red Dead 2 digital content.

One potential weakness is the low revenue performance attributable to the mobile area. Mobile gaming is growing even faster than gaming and is digitally delivered, offering high margin revenue growth.

Social Point, which Take-Two acquired on January 31, is the companyís primary mobile revenue generator. However, it is only expected to provide 5 percent of net sales or approximately $100 million in Fiscal 2018. Look for Take Two to go after additional mobile acquisitions in the future

Note to Readers:

I will be teaching one course, Advanced Investment Analysis, beginning on Monday, January 8, for the Ringling Collegeís Lifelong Learning Academy. Call 941-309-5111 for registration and information.

My 9th annual talk sponsored by the non-profit American Association of Individual Investors (AAII), titled: Wall Street 2018 – Where Do We Go Now?î, will be on Thursday, January 18, at the Hyatt Regency, 1000 Blvd. of the Arts. Registration/Social/Refreshments 3:00 P.M., Program 4:00 to 5:30. Please call 941-706-3449 to register. $10 per person at the door.

Lauren Rudd is a financial writer and columnist. You can write to him at Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to