What to Know Before Buying Take-Two Stock

Take-Two Interactive (NASDAQ: TTWO) stock is one of the best ways to invest in the $200 billion video game industry. The stock soared 586% over the last 10 years, primarily due to the strong sales of Grand Theft Auto, one of the most popular video games on the market.

Take-Two stock is nearing new highs following stellar financial results this year. The stock underperformed the S&P 500 over the last five years, but it has significantly outperformed since 2022, up 123% compared to the S&P 500's 68% gain.

With the company expected to generate record financial results in a few years, the stock is likely to continue hitting new highs. Here's what you need to know before investing in this top game company.

Image source: Getty Images.

How Take-Two generates revenue

One reason Take-Two is a good investment is that it generates revenue year-round from players spending money on in-game content, also known as recurrent consumer spending. More than 70% of Take-Two's non-GAAP revenue, or bookings, comes from recurrent consumer spending, which grew 20% year over year in the recent quarter.

In-game spending creates high-margin sales for Take-Two, but investments in new games and the integration of acquisitions, particularly mobile game leader Zynga, have weighed on the company's profits in recent years.

However, recent momentum in the business is driving significant growth in free cash flow, which reached $192 million on a trailing 12-month basis. This represents a significant turnaround from the negative free cash flow experienced a year ago.

Game companies are not competing with each other as much as they are for players' time. Take-Two's recent growth shows it is executing well. The company's bookings surged 33% year over year in the recent quarter, which is significantly faster than the industry's 3% growth expected this year. Take-Two is clearly making games that players want to spend time on, which gives the business momentum ahead of a significant growth catalyst next year.

Why the stock is a buy

Grand Theft Auto V has sold 220 million copies since its release in 2013, while Take-Two's other franchises, such as NBA 2K and Borderlands, also continue to contribute to its annual revenue.

The company expects the launch of Grand Theft Auto VI, scheduled for release later in calendar 2026, to fuel substantial growth. Analysts expect the company's bookings to exceed $9 billion by the end of fiscal 2028 (which ends in March), with free cash flow projected to exceed $2 billion. This represents an increase from $6.5 billion in bookings and $132 million in free cash flow expected for fiscal 2026.

It is executing a long-term strategy to broaden its game lineup, particularly from existing franchises that already have dedicated fan bases. Its latest financial results show it is executing well and should remain a rewarding long-term investment.

John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Take-Two Interactive Software. The Motley Fool has a disclosure policy.