Video game producer and designer Take Two Interactive (TTWO-NASDAQ)

Video game producer and designer Take Two Interactive (TTWO-NASDAQ), is reviewing how it does business in the current volatile market.  You are a junior analyst for the company, tasked with contributing a portion of the competitive analysis. You have been asked to draft a comparative financial analysis that creates a basic benchmark your company’s performance. This task is an opportunity for you to showcase your competency in research, analysis, writing, and public speaking.

You need to determine TTWO’s position in the market by conducting a basic comparative analysis of TTWO versus a competing company within the industry.  You must submit a memo to the company CEO and make an oral presentation explaining the company’s financial strength and its strength compared to the selected competitor at a company strategy meeting.   You need to compare five key indices of financial strength:

 

• Stock price – 1 year, 6 month, Intra-day (Use on or about August 29, 2016 as the present date)
• Sales/Revenue (over the last three full-years)
• P/E Ratio
• Net Income (over the last three full-years)
• EPS

In addition, for each metric analyzed, explain the reason for the company’s performance and provide support for your reasoning.

To begin, you will need to research TTWO’s financial statements. You can find this information on the company website, company 10K Report or on a number of Cook library databases, e.g. Standard &PoorsNetAdvantage, LexisNexis Academic (Business > Company Dossier) or Yahoo Finance.

Next, you will need to research one of TTWO’s competitors across the same five indices and compare its performance with  the competitor.

Part I – Written Evaluation

You will need to draft a report memorandum that succinctly compares the financial strength of both companies.
Your report should answer several key questions:

• What was your rationale for selecting the competitor to serve as a measure for the analysis?
• What did you learn from the comparison of these companies?
• What is the significance of each index to your comparison?

This will require you to use some of the basic principles of business writing:

• Proper memorandum format
• Proper addressee (research the name of the CEO)
• Proper use of sources using APA format
• Include an introductory statement that foreshadows or “sells” the main idea
• Use deductive structure, using strong topic sentences and supporting data
• Condense information using tables, charts, graphs and bulleted points when appropriate
• Use well developed headings
• Use chunked paragraphs

Criteria

When you present your information, I will be evaluating your ability to write clearly and succinctly. In other words, get to the point. What is the most important information? I should be able to scan your document and pick out key information quickly and efficiently. If I cannot skim the document in under two minutes, then you did not do your job. Additionally, this document must contain clean and well-proofread content (error-free prose). Careless and errant errors in your LOCs (grammar, spelling, punctuation, and word choice) will result in a deduction in your grade.

2- THE MEMO

 

This memo is intended to compare the financial performance of Take Two Interactive to that of Activision Blizzard. Both companies are sizeable presences in the U.S. software industry, and as such serve as valid comparisons.

 

Stock Price(Google Finance, 2016)

	TTWO	ATVI
1 year –	TTWO has shown a clear and fairly consistent uptrend in stock price from 09/04/2015 to 8/29/2016, starting from the $30 range, up to the $44.11 price of 8/29/2016.	ATVI’s year over year price action shows a lot more volatility, though otherwise shows very similar patterns to TTWO; however despite a much higher run into the end of December, ATVI fell back more than 40% into February of 2016, while TTWO steadily climbed.
6 month –	TTWO’s 6 month performance shows steady growth of about 22%, though the first 3 months wound up generally flat. However compared to ATVI’s price, this may be more related to wider industry trends.	ATVI showed strong and consistent growth over the 6-month period, and significantly outpaced TTWO without suffering too much from the apparent wider market drawbacks to wind up at about 30% growth. However at its peak in this period, ATVI grew 34%, a 20% gap over TTWO’s then-current rate.
Intra-day –	Over the day, TTWO grew more than 4.5% and showed a linear growth pattern.	ATVI also showed a linear growth pattern, however gains for the day capped at just above a mere 0.5%.
Stock Price Conclusion: From the standpoint of just stock price,TTWO looks much more attractive to long-term investors who want to benefit from general market gains in the software industry, but who do not necessarily want the price volatility associated with “bleeding edge” software companies like ATVI. However in this case the stock price is somewhat deceptive.

 

Revenues (NASDAQ, 2016)

	2016	2015	2014
TTWO	$1.413 billion	$1.082 billion	$2.350 billion
ATVI	$3.025 billion	$4.664 billion	$4.408 billion

 

P/E Ratio

TakeTwo’s PE ratio is 673.33 as of August 29, 2016 (Google Finance, 2016). The main reason for this astronomical ratio is the company’s particularly low earnings per share, at a mere 0.07 (Google Finance, 2016). Meanwhile ATVI’s P/E is a more nominal 43.85, which is fairly average for the industry (Damodaran, 2016). Given the PE ratio in light of the miniscule EPS, it is clear that ATVI represents better value per dollar.

 

Net Income (NASDAQ, 2016)

	2016	2015	2014
TTWO	($8.3 million)	($279 million)	$361 million
ATVI	$749 million	$892 million	$835 million

 

TTWO’s significant losses are points of concern; according to sources, the company blamed 2015 losses on deferred revenues and costs of goods sold (Caplinger, 2015). While this sounds reasonable, it is not clear that the company is doing anything to improve the situation, apart from having sustained significantly less losses so far this year, which could be problematic with the shift from physical to digital software distribution. ATVI meanwhile lost a little year over year, but benefitted from its recent acquisition of King Digital Entertainment, the owners of the famous Candy Crush series, also effectively positioning ATVI for future growth on mobile platforms (Zacks, 2016).

 

EPS

TTWO’s EPS as of August 29, 2016 was as mentioned a mere 0.07, with the best explanation apparently being that the company depends on particularly powerful series to carry its revenues, and in periods without releasing new entries into these series, the company’s earnings suffer (Caplinger, 2016). While the company does own some big name series in videogames, it is not clear what the company is doing to improve earnings apart from cashing in on these. ATVI’s EPS was a solid 1 (Google Finance, 2016), which is more in line with the average of other companies in the same industry.

Conclusions

Despite the worrisome performance by TTWO, the stock price has paradoxically managed to continue to rise at a steady pace, possibly in part because its release of major franchises constitutes a predictable pattern of earnings – for instance, TTWO has rights to at least two major sports franchises (NBA and WWE), with new versions of the game being put out every year (and so serving as a comparison for growth).

 

However looking forward, ATVI has a lot more growth potential for emerging platforms like virtual reality and mobile gaming. ATVI also owns some major franchises, making it a more attractive option from an operational standpoint, though investors should be prepared for greater volatility that will follow ATVI’s establishing its position in emerging trends for the industry.

 

TTWO does not appear to be doing much beyond riding existing franchises, and with more recent performance data, it is questionable whether the company will be able to maintain such a consistent stock price if it does not diversify its operations somehow. Even so, analysts have projected better numbers (particularly EPS) for the next two years, however there does not appear to be any immediately apparent evidence supporting such expectations. The latest conference call with the CEO suggested that the company is seeing increasing profitability from its participation in microtransactions, in which consumers can purchase additional features within the game using actual currency. But it is not clear that this in itself will carry the company’s profitability, especially if it does not make any attempts to reduce its dependence on physical inventory and thus deferred payments.

 

At the current point in time, while TTWO has historically remained stable, the stock seems more like a gamble than a safe bet, and for the relatively similar risk, ATVI appears to have a much greater potential to increase profits, especially if it reaches into the mobile and virtual reality gaming platforms with the franchises it does have rights to.