Take-Two (TTWO)

Video game publisher Take Two (NASDAQ:TTWO) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 13.1% year on year to $1.58 billion. The company expects next quarter’s revenue to be around $1.38 billion, coming in 4.7% above analysts’ estimates. Its GAAP loss of $21.08 per share was significantly below analysts’ consensus estimates.

Company Overview

Best known for its Grand Theft Auto and NBA 2K franchises, Take Two (NASDAQ:TTWO) is one of the world’s largest video game publishers.

Since videogames were invented in the 1970s, they have gradually taken more share of entertainment time. Ubiquitous mobile devices have powered a surge in “snackable” games that can be played on the go. Over time, games have developed more social engagement features where friends can play games together over the internet. The business models of games publishers have become less volatile due to digitization of distribution, in game monetization, and like Hollywood, an increasing dependence on surefire hit franchises. Covid driven lockdowns accelerated adoption and usage of videogames – a trend that has not slowed.

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Take-Two grew its sales at a solid 17.1% compounded annual growth rate. Its growth beat the average consumer internet company and shows its offerings resonate with customers.

This quarter, Take-Two reported year-on-year revenue growth of 13.1%, and its $1.58 billion of revenue exceeded Wall Street’s estimates by 0.9%. Company management is currently guiding for a 2.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 37.1% over the next 12 months, an acceleration versus the last three years. This projection is eye-popping and implies its newer products and services will fuel better top-line performance.

For gaming businesses like Take-Two, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include royalties to sports leagues or celebrities featured in games, fees paid to Alphabet or Apple for games downloaded in their digital app stores, and data center hosting expenses associated with delivering games over the internet.

Take-Two’s gross margin is slightly below the average consumer internet company, giving it less room to invest in areas such as product and marketing to grow its presence. As you can see below, it averaged a 54.7% gross margin over the last two years. Said differently, Take-Two had to pay a chunky $45.33 to its service providers for every $100 in revenue.

This quarter, Take-Two’s gross profit margin was 50.8%, marking a 10.8 percentage point decrease from 61.6% in the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Consumer internet businesses like Take-Two grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).

It’s expensive for Take-Two to acquire new users as the company has spent 54.9% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates that Take-Two’s product offering can be easily replicated and that it must continue investing to maintain an acceptable growth trajectory.

Take-Two has been an efficient company over the last two years. It was one of the more profitable businesses in the consumer internet sector, boasting an average EBITDA margin of 12.4%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Take-Two’s EBITDA margin decreased by 10.6 percentage points over the last few years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Take-Two generated an EBITDA profit margin of 10.2%, up 2.6 percentage points year on year. The increase was encouraging, and because its gross margin actually decreased, we can assume it was more efficient because its operating expenses like marketing, R&D, and administrative overhead grew slower than its revenue.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Take-Two, its EPS declined by 109% annually over the last three years while its revenue grew by 17.1%. This tells us the company became less profitable on a per-share basis as it expanded.

We can take a deeper look into Take-Two’s earnings to better understand the drivers of its performance. As we mentioned earlier, Take-Two’s EBITDA margin improved this quarter but declined by 10.6 percentage points over the last three years. Its share count also grew by 51.4%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q1, Take-Two reported EPS at negative $21.08, down from negative $17.02 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Take-Two’s full-year EPS of negative $25.39 will flip to positive $1.35.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

While Take-Two posted positive free cash flow this quarter, the broader story hasn’t been so clean. Take-Two’s demanding reinvestments have consumed many resources over the last two years, contributing to an average free cash flow margin of negative 3.4%. This means it lit $3.39 of cash on fire for every $100 in revenue. This is a stark contrast from its EBITDA margin, and its investments (i.e., stocking inventory, building new facilities) are the primary culprit.

Taking a step back, we can see that Take-Two’s margin dropped by 6.6 percentage points over the last few years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s in the middle of a big investment cycle.

Take-Two’s free cash flow clocked in at $224.9 million in Q1, equivalent to a 14.2% margin. Its cash flow turned positive after being negative in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.

Take-Two reported $1.47 billion of cash and $4.11 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $635.9 million of EBITDA over the last 12 months, we view Take-Two’s 4.2× net-debt-to-EBITDA ratio as safe. We also see its $106.5 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results as its EPS missed and its full-year guidance fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 1.7% to $228.50 immediately following the results.

Updated: May 21, 2025 at 10:14 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Take-Two, you should also grasp the company’s longer-term business quality and valuation.

Take-Two isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was solid over the last three years, it’s expected to deteriorate over the next 12 months and its declining EPS over the last three years makes it a less attractive asset to the public markets. And while the company’s projected EPS for the next year implies the company’s fundamentals will improve, the downside is its declining EBITDA margin shows the business has become less efficient.

Take-Two’s EV/EBITDA ratio based on the next 12 months is 19.1x. This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $242.30 on the company (compared to the current share price of $229.56).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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