The Sunny Side of the Late Early Cycle

Andrew Sliman (0:03)

I have never seen the magnitude of these earnings increases that I have seen year to date. And if this continues, we're gonna look back and say, wow, the stock market wasn't expensive, it was actually cheap.

Jack Hough (0:21)

Hello and welcome to the Barron Streetwise podcast. I'm Jack Hough, and the voice you just heard, that's Andrew Sliman. He's a Senior Portfolio Manager at Morgan Stanley Investment Management. Last week, we heard a somewhat cautious view on the market. This week, we'll hear from Andrew about a sunnier outlook. You can compare the two and go with one you like more, or you can take an average. You can arm wrestle yourself for it, whatever you like. We'll hear from Andrew in just a moment. First, we'll say a few words about a big development in felonious video gaming.

Let's get into it.

I cannot believe that it has been 25 years since I stole a Mr. Whoopie ice cream truck, and rigged it with a bomb, parked it near the docks, and then played the jingle to lure rival gang members to murderous, dairy-based doom.

They say enjoy it while you're young, they're not wrong. Back then, I had time for occasional Grand Theft Auto, as with a capital G, N, T, and A, as in Grand Theft Auto III, a landmark video game from Take-Two Interactive. I bet many of you are familiar with Grand Theft Auto, but if you're not, GTA I and II in the late 1990s, those were pretty simple two-dimensional affairs. They had a top-down perspective. This company, Take-Two, bought the studio behind those games, and then it created something called Rockstar Games to develop edgy cinematic titles. And in 2001, it came out with GTA III, which was a total departure, a naughty revelation, you might say. This was a first-person, three-dimensional, open world of beauty and barbarity. I did things with a rocket launcher and a flamethrower back then that I'm still not proud of, and I'd like to apologize to the entire Liberty City Police Department.

But I also sometimes pulled over my banshee sports coupe just to admire the sunset, even with a four-star wanted level, while I ran so far away from a flock of seagulls played on Flashback 95.6.

But enough about my life of crime. GTA 3 was transformative for take-two shares. In the month leading up to the game's launch in 2001, the stock had dipped below $5 a share, split-adjusted. Two decades later, it was $180, and shareholders had done more than four times as well as they would have in the S&P 500 index. However, over the past five years, the stock has disappointed. It's gained only 28%, while the S&P, with dividends, has made 90%.

I didn't keep up with the franchise, by the way. Somewhere around GTA 4, I got married, and before long, I was immersed in an even more chaotic first-person open-worlder called Parenting. But now I hear that after much delay, there's a new installment, GTA 6, that looks likely to ship in November. And this one seems particularly significant for what is now a struggling stock.

See, GTA releases used to be frequent. Over the first decade after the game went 3D, there was nearly one a year if we count major and minor titles. And then there were a few quiet years, and in 2013, Take-Two launched GTA 5 That one added a multiplayer mode, which is now available separately as GTA Online. And there hasn't been a new version in the 13 years since. Why? Well, the online game operates as a continuous money maker, kind of like Roblox or Fortnite. If you're a new player, you buy the game, you spend on in-game currency, you can use that to get special vehicles or apartments or weapons, what have you. And you might even pay a monthly membership fee for other perks. So Take-Two revenues over the past 13 years have multiplied, and growth has gotten smoother. But there are good reasons for a new release now.

If Take-Two modernizes the mapping technology, it'll allow for bigger worlds with better artificial intelligence and physics. If it updates the monetization system, it can draw closer to a lucrative Roblox type model of allowing players to create and profit from content in exchange for a cut. Plus, fans of the series, they want a new single player storyline, like the one I used to play. By giving them one, Take-Two will boost upfront game sales. But there have been delays. GTA 6 was originally supposed to come out last year. The latest target launch date is in November. There was recently a leaked Best Buy email related to imminent free orders. That was enough to make investors think maybe we're really on for November and to send Take-Two shares 6% higher in a day. The shares are not obviously cheap at over 50 times projected earnings for the company's fiscal year which runs through March 2027