Meet the Monster Stock That Continues to Crush the Market

Key Points

• Take-Two Interactive's stock has outperformed the overall market.

• The game publisher generates revenue in a variety of ways.

• The share price increase has resulted in a richer valuation.

If you own individual stocks, it's useful to compare the performance to a benchmark. That's because you can invest in a low-cost index fund that tracks the broad-based S&P 500 or the Nasdaq Composite.

Take-Two Interactive Software (NASDAQ: TTWO) has easily bested both indexes over various time periods. In the past year through June 27, the stock has gained over 55%. During this time, the S&P 500 index appreciated 13.1% and the Nasdaq Composite rose 14.3%.

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Investing based purely on a stock's momentum isn't a sound long-term investing strategy, however. To make that determination, it's better to understand the company's business. Let's dive in.

Image source: Getty Images.

Understanding the company

Take-Two Interactive Software creates and sells games under brands like Rockstar Games, 2K, and Zynga. It makes these games for a variety of consoles like Microsoft's Xbox, smartphones, and personal computers.

Popular titles include Grand Theft Auto, Red Dead Redemption, the NBA 2K series, and Borderlands. The company doesn't just make money from selling games, but also through advertising, user purchases of in-game virtual items, and revenue from virtual currency.

The company calls revenue generated from outside game sales "recurrent consumer spending," and it represented over 79% of the latest fiscal year's top line (ended on March 31). These activities provide steadier revenue than selling games, which can fluctuate based on release dates.

Take-Two Interactive's total revenue showed momentum. Its fiscal fourth-quarter revenue under generally accepted principles (GAAP) grew 13% to $1.6 billion with recurrent consumer spending increasing 9%. For the year, revenue increased 5.3% to $5.6 billion. Management expects revenue to reach about $6 billion this year.

Can it continue outperforming?

Still, while Take-Two Interactive produces revenue growth, it reports losses under GAAP. It lost $4.5 billion last year, even after excluding $3.8 billion in impairment charges. This year's loss under GAAP is wider than the prior year's $3.7 billion. It expects to lose $439 million to $499 million this year.

Take-Two Interactive also reports EBITDA, or earnings which exclude those impairment charges along with other items like interest expense and depreciation. On this basis, the company reported EBITDA of $199.1 million last year, down from $272 million. However, most of the EBITDA came in the fourth quarter, and management expects this year's figure to skyrocket to $508 million to $562 million.

Going forward

Since Take-Two Interactive doesn't report a profit, you can't use the price-to-earnings (P/E) ratio to measure its valuation. However, the price-to-sales (P/S) ratio is another metric that you can apply. On this basis, the stock's big gains have resulted in a more expensive valuation. The shares have a P/S ratio of 7.5, up from 4.5 a year ago.

The shares also look rich in comparison to the overall market. The S&P 500 and Nasdaq Composite have P/S multiples of 3.2 and 6.6, respectively. With management expecting only about 7% revenue growth next year, it's hard to justify the current P/S multiple right now.

The new version of the Grand Theft Auto video game, a very popular franchise, is currently scheduled for release in May 2026. That could accelerate next year's top-line growth, but the share price seems to have a successful launch built in based on the valuation.

I also prefer companies that report a profit. After all, that's the name of the game and what ultimately creates or destroys long-term shareholder value. With the sharp run-up in the share price, I'd stay away from the stock right now.

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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Take-Two Interactive Software. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.