Smart Timing for a "Grand Theft Auto" Sequel Could Deliver Huge Gains for Take-Two Interactive - Nasdaq

Take-Two Interactive's (NASDAQ: TTWO) Grand Theft Auto V is, by many metrics, the most successful video game of all time. Some reports suggest that it's actually the single most profitable entertainment release ever. The title has shipped over 115 million copies and generated tons of high-margin revenue through its online mode. Plus, it's still putting up strong sales and keeping players engaged. Much of the bull case for investing in Take-Two hinges on the idea that it will eventually deliver another successful Grand Theft Auto (GTA) sequel.

The company may be hesitant to release a follow-up while GTA V is still putting up strong sales, due to fears that a new title might cannibalize revenue from the current one. Nevertheless, next year would be the optimal time for the company to release Grand Theft Auto VI. The best-case scenario for investors is that the company replicates the release strategy it used for GTA V: Debut the sequel at the tail end of the current video game console cycle, make it available only on current platforms for roughly a year, and then release an updated version for PC and Sony and Microsoft's new platforms in order to encourage repeat purchases.

Image source: Take-Two Interactive.

The franchise (and release timing) that made shareholders rich

Take-Two stock has risen by more than 1,000% since the start of 2013. While the successes of properties like NBA 2K, WWE 2K, Red Dead Redemption, and Borderlands have played a role in those incredible share price gains, Grand Theft Auto V has been by far the biggest driver of the company's market-crushing performance.

GTA V launched in September 2013 on Sony's PlayStation 3 and Microsoft's Xbox 360. These consoles were near the end of their life cycles, and had built up large installed bases, which made it the ideal time to release a high-profile title that could attract a large player base, even though next-gen consoles were also debuting that year.

Grand Theft Auto V sold over 11 million units in its first 24 hours on the market, according to Guinness World Records. The game generated over $1 billion in revenue within its first three days on the market. By the middle of 2014, the title had shipped over 34 million copies across just the PlayStation 3 and Xbox 360 platforms,. Subsequently, many players double-dipped and bought the updated versions that later shipped for PlayStation 4, Xbox One, and PC. 

Take-Two is surely keenly aware of this dynamic, and it has a huge incentive to attempt to replicate it. 

Grand Theft Auto is an industry-defining franchise

Microsoft and Sony are expected to launch new consoles in the fourth quarter of 2020. Rather than releasing a new entry in its marquee franchise to take advantage of excitement for those high-tech, next-generation platforms, Take-Two would be better served by releasing it on Xbox One and PlayStation 4 as these platforms are reaching maturity and their successors are just hitting the market. 

It will take years for consumers to buy enough next-gen consoles to give them the installed base of roughly 150 million units that PlayStation 4 and Xbox One now combine for. Grand Theft Auto V served as a "last hurrah" of sorts for the PlayStation 3 and the Xbox 360. Take-Two shareholders should hope that the company positions GTA VI to play a similar role on the current platforms. 

Of course, rushing the game to market in order to make an arbitrary release date wouldn't be a smart move. GTA V still regularly shows up on the lists of best-selling games in North America and Europe, and a huge part of that is down to it being high quality and packed with content. Still, if Grand Theft Auto VI launches late next year, it will have been seven years since the debut of the series' last mainline installment. That ought to be enough time for developers to have cooked up a suitable successor.

GTA VI will be a hit no matter what, but timing is key

Shareholders don't need to worry about Take-Two missing out on the sales that will be driven by excitement over the next generation of consoles. It will almost certainly have its next NBA 2K franchise installment available for the new PlayStation and Xbox consoles when they launch, and the update of the basketball game will likely be a bestseller on both platforms. Take-Two could also launch an updated version of Red Dead Redemption 2 for the new platforms.

Investors should hope that the company keeps Grand Theft Auto VI exclusive to PlayStation 4 and Xbox One for roughly a year in order to allow the game to rack up substantial sales on those platforms before it goes on to be a big hit on next-generation consoles. The success of GTA VI won't be dependent on this strategy, but it could add tens of millions of lifetime unit sales for the game and be a major catalyst for Take-Two stock.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Keith Noonan owns shares of Take-Two Interactive. The Motley Fool owns shares of and recommends Microsoft and Take-Two Interactive and recommends the following options: long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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