Take-Two Interactive Software

Take-Two slightly beat the low bar it set with its fiscal first-quarter guidance, and its outlook for the second quarter similarly calls for a sizable decline in bookings (cash sales). All of this is a sideshow, as Take-Two will release Grand Theft Auto VI in November.

Why it matters: GTA VI is widely expected to be the biggest video game release ever, and its success will make or break Take-Two's financial results for at least the next two years. The effect of any results before then are almost immaterial. Management said GTA VI preorders are at historic levels, and we think its $8.1 billion full-year bookings guidance is conservative, as do FactSet consensus estimates. However, consensus envisions bookings growing further in fiscal 2028 and fiscal 2029, which we disagree with.

The bottom line: We maintain our $170 fair value estimate, which is far more sensitive to the wide range of outcomes following the GTA VI release than anything else. We see the stock as overvalued. In our view, GTA VI is more likely to disappoint than exceed expectations, not because it will lack for popularity or have lackluster first-year sales, but because such high levels of sales won't have staying power.

Key stats: First-quarter bookings declined 3% year over year, and the firm expects second-quarter bookings to drop more than 15%. NBA 2K27 will be released in the second quarter, and it will follow a highly successful NBA 2K26, which sold 9% more units than the prior year's edition. Take-Two's mobile unit is also facing difficult comparisons after success with multiple games last year, notably its Color Block Jam release. First-quarter mobile bookings declined 7%. The first-quarter adjusted EBITDA margin declined to 9%, from 15% the prior year, and free cash flow was negative. However, we expect both to grow substantially this year, and we expect GTA VI will drive high free cash flow for multiple years, after the firm generated virtually none in total from fiscal 2024-26.

Our fair value estimate for Take Two is $170, which implies a 15 times EV/adjusted EBITDA multiple on our fiscal 2027 forecast.

We project sales growth of roughly 25% in fiscal 2027 upon the release of GTA VI and only a slight dropoff in 2028, as the firm likely releases the game to PC users and continues to have outsize recurrent GTA spending in the first year after the release. We expect GTA VI to make up more than 40% of fiscal 2027 sales when including both initial game purchases and the in-game recurrent consumer spending that follows. However, we expect GTA’s proportion of total sales to wane after 2028, leading to a revenue decline in 2029. Overall, we project revenue to grow at a 7% compounded rate over our 10-year forecast.

Grand Theft Auto V, which was released in fiscal 2014, sold about 30 million copies within the first quarter of being released and roughly 35 million-45 million copies in the first year. We expect GTA VI to eclipse those figures, as GTA V's popularity has grown and the franchise now has a bigger and more eager fan base than it had at the last release. We forecast Take-Two to sell more than 50 GTA VI copies in fiscal 2027.

We project adjusted EBITDA to grow at a midteens rate throughout our forecast, as we expect a big jump in margin in fiscal 2026—from 17% to 21%—followed by maintenance at this higher level. In fiscal 2026, we expect significant leverage on GTA VI sales, even as many associated costs will be recognized. We expect the company to generally raise research and development expenses modestly each year, but we don't expect the level of expense that has been associated specifically with GTA VI. As projected sales for that title wane, capitalized software costs should decline, as these are generally associated with specific titles.

We expect free cash flow to also benefit from finally generating GTA VI sales and a reduction in payments to the GTA VI developers. After failing to generate free cash flow from fiscal 2023-25, free cash flow exceeded $400 million in fiscal 2026, and we project more than $1.5 billion in fiscal 2027, a level we expect the firm to continually surpass throughout the rest of our forecast.

We assign Take-Two a narrow moat based on intangible assets, specifically ownership of intellectual property and established fan bases for the firm's franchises and development studios.

Returns on invested capital have been depressed over the past several years, but we attribute that to a long dry spell of major game releases over that time and the heavy investment going into Grand Theft Auto VI. Apart from its NBA 2K franchise, which releases a new edition annually, Take-Two’s most successful franchises are Grand Theft Auto, Red Dead Redemption, Borderlands, Civilization, and BioShock. None released a sequel between 2019 and 2025. However, Borderlands released a new title in fiscal 2026, and Grand Theft Auto VI is due in fiscal 2027, after which we expect ROICs to exceed WACC. We expect the popularity of these current franchises to spur excess economic returns, on average, for at least the next several years, and we believe the popularity and credibility of the firm’s 2K and Rockstar game developers provide an edge over smaller competitors in developing the next huge video game franchises.

We see the video game industry as one where multiple publishers can succeed because gamers have different tastes in types of games, and they can and do play multiple genres of games. However, we generally think the biggest companies with established success gain advantages in continuing to launch successful games.

Take-Two's business is much choppier and more unpredictable, in our view, than that of rival Electronic Arts. While the NBA 2K franchise is successful, the firm's fortunes and sales are much more dependent on nonsports video games that do not release annual editions. Take-Two typically releases sequels for its major successful franchises every five to 15 years. It usually takes years for video game developers to create new iterations of games, and these subsequent editions require significant amounts of investment—typically hundreds of millions to billions of dollars. When successful, these games drive massive sales upon release, and the games can continue to generate revenue throughout their lifetime by offering updates and in-game sales.

Grand Theft Auto is Take-Two's most successful franchise. The firm released Grand Theft Auto V in calendar 2013, and that title has sold more than 230 million copies. Grand Theft Auto made up 35% of Take-Two's total revenue from fiscal 2014 through fiscal 2022, and GTA has made up about 15% of revenue since then. Take-Two is slated to release Grand Theft Auto VI, which we believe has cost over $2 billion to develop, in November 2026.

The massive success and fan base of the GTA franchise have made GTA VI an eagerly anticipated game, and the firm is likely to sell tens of millions of copies immediately upon release. The intellectual property and established player bases behind this and the other major established franchises significantly increase Take-Two's odds of having successful video game releases relative to competitors that don't have established hit franchises. On the other hand, publishing a dud would result in substantial destruction of capital. On the spectrum of “odds of success” relative to investment, we believe that annual releases of popular established sports games are most likely to be successful, new versions of established franchises are next, and brand-new franchises are most speculative. However, when nonsports franchises hit, they tend to have higher ceilings than sports games, which change less between editions and have more predictable spending.

Unlike sports, however, we don't assume that other major franchises can retain relevance and popularity indefinitely. For Take-Two, that means that the firm needs to develop new franchises, in our view, if it is to remain successful beyond the next releases of current hits at any given time. However, with its established and trusted developer labels, we think Take-Two has an edge over smaller or independent developers.

Rockstar, especially, is noted for having strong developers and releasing popular games. While it undoubtedly needs to produce entertaining content, we see a brand advantage that gives it the benefit of the doubt and will drive many gamers to any new game it releases as long as its track record remains untarnished. For example, if Rockstar were to launch a new role-playing-style video-game franchise on the heels of GTA's success, we'd expect significant enthusiasm among fans and a higher likelihood of success than a new game from an unknown developer.

Beyond the benefit of built-in initial excitement, major video game companies have advantages in actual game development. Take-Two can rely on the Rockstar game engine, Rage, which includes the tools and intellectual property software library of Rockstar's past creations. This alleviates the time and spending required to create all components of video games from scratch and offers successful and tested tools. Smaller developers without their own game engines would need to use third-party game engines and build more from scratch.

Finally, Take-Two has the financial resources to hire and retain the most talented developers, fund multiple major projects simultaneously, invest heavily in research and development, offer budget leeway to continue optimizing new games, and market new games to whatever extent necessary. We don't see any of these advantages as determinative, but they lead us to believe that Take-Two and the other major video game companies have a head start in publishing hits and retain an advantage over libraries from newer competitors.

Grand Theft Auto VI will ride on the popularity of the 230 million copies of Grand Theft Auto V sold, and in-game purchasing will give this title a multiyear runway of high sales.

The success of Grand Theft Auto has given Take-Two the resources to put many irons in the fire to develop the next huge franchise.

Ownership of Zynga gives Take-Two a big piece of the mobile market, which can attract nongamers and generally be played for free by anyone with a mobile device.

Take-Two lives and dies with Grand Theft Auto, and if GTA VI disappoints, the stock will likely get crushed, and the ability to invest in the future will be hindered.

Grand Theft Auto VI has reportedly cost over $2 billion to develop and is going against expectations that will be difficult to beat.

Apart from NBA 2K, most of Take-Two's major games have many-year intervals between titles, making the operating performance subject to periods of relatively lean sales and profits.