The video game market is expanding and changing rapidly. How are these two market leaders capitalizing on growing trends like esports and free to play games?
The video game market is expanding and is set to be a $300 billion industry by 2025. People are also spending more time indoors due to the COVID-19 outbreak, which could be a tailwind for these companies. We will assess how these companies have performed and how they are positioned for future growth.
Take Two Interactive
Take-Two Interactive (NASDAQ: TTWO) is an American video game holding company and owns publishers such as Rockstar games, who make ‘Grand Theft Auto’ and ‘Red Dead Redemption’.
GTA is the best selling video game of all time and in 2019 took in $595 million in revenue which is a testament to the strength and longevity of the game since its release in 2014. Take-Two have continued to add new features in order to entertain players, along with in-game purchases. Take-Two has been tight-lipped about the release of GTA VI and if history is any guide, we may be waiting some time as GTA V and its online mode continues to generate significant income.
Take-Two has invested in emerging opportunities such as mobile gaming with the acquisition of Socialpoint in 2017 for $250 million. Take-Two is also capitalizing on the growth in esports and their game ‘NBA 2K’ basketball game has a league. They have established partnerships in China with Tencent (OTC: TCEHY) to stream games from ‘NBA 2K’s’ league. Although it is not clear what the value of this market is to Take-Two, it could be a significant driver of growth in the years to come. The global esports market set to grow to $1.1 billion in 2020 alone, an increase of 15% on the year prior.
Take-Two’s revenue has generally jumped with the release of new titles such as ‘Red Dead Redemption II’ while recurring revenue has continued to grow increasing by 15% year over year and stood at 37% for Fiscal Q3 2020. Operating cash flow stood at $547.9 million which is significantly lower than Activision (NASDAQ: ATVI).
Take-Two will announce its Q1 2020 earnings on Wednesday 20 May.
Activision Blizzard has a significantly larger market cap than Take-Two at roughly $50 billion.
‘Call of Duty: Modern Warfare’ was the best selling video of 2019 according to Forbes. Activision has tried to capitalize on the trend of free to play games that have in-game purchases. This model has proved to be extremely profitable for other games such as ‘Fortnite’ due to the high margins. Activision has released a multiplayer, cross-platform game called ‘Call of Duty Warzone’ that is a direct competitor to ‘Fortnite’ and has had huge success.
Activision, through its King division, owns well-known games such as “Candy Crush” which has 249 million monthly active users — more than its other segments combined. This exposure to the mobile gaming market is increasingly relevant and an exciting opportunity for it to exploit. They have also released ‘Call of Duty: Mobile’ which had more than 150 million downloads and made $116.8 million in 2019. Activision’s exposure to the mobile gaming market could prove to be a huge catalyst for growth due to the increasing users and may gain further traction with the introduction of 5G.
In Q4 of 2019 revenue was $1.99 billion and exceeded analyst expectations. Activision had $1.83 billion of operating cash flow for the year ended 31st of December 2019. The total assets on the balance sheet significantly outweigh the liabilities by over 2:1 and leave it in a good place financially.
The number of U.S. gamers over the age of 35 stands at 56%. These users typically have a larger disposable income than younger users. Activision has released titles such as “World of Warcraft Classic” that creates a sense of nostalgia for these demographics.
The video game industry has seen a significant change in the last few years with a move away from buying discs to digital storefronts which have been detrimental to companies like GameStop (NYSE: GME). The ability of both Take-Two and Activision Blizzard to consistently produce top quality content and keep up with new trends should allow them to prosper in future years. Both these companies should reward investors and are a good addition to a diversified portfolio.
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