Newsflow is the video gaming industry is definitely improving after the post-pandemic lull. Nintendo’s latest Zelda set a new record for the series (10 million units sold in 3 days), confirming that consumer spending on well-known franchises remains well oriented and largely unaffected by the macro environment.
And importantly, most game publishers are now taking the opportunity of a rising supply and installed base of next-generation consoles (more specifically, PS5) to announce ambitious game line-ups for the next 18 months that will fuel growth across the industry. For instance, Ubisoft confirmed last week its most impressive game schedule in years with the release this fiscal year of two blockbusters (Assassin’s Creed Mirage and Avatar Frontiers of Pandora) and three other major titles (including the Crew and two new intellectual properties). Even if the potential of some of these titles can be open to debate, the French game maker is on track to deliver c.25% top-line growth with a strong profitability improvement.
Also, Japanese game publisher Capcom, in collaboration with Niantic, the developer behind the hit Pokemon Go, announced the launch of an Augmented Reality (AR) version on mobile devices of its blockbuster Monster Hunter. That will be the opportunity to test as soon as September the appetite of consumers for the AR technology, which mixes digital images with real-world environments and will take players through their neighborhood or city on the hunt for monsters.
But the announcement that stood out in recent days was Take-Two’s impressive guidance for FY25 ($8 billion bookings, up 45% compared to current FY24, $1 billion in adjusted cash flow, compared to $100 million in FY24), that suggests that GTA VI, the next instalment in the Grand Theft Auto series, will ship around the 2024 holiday season.
For those who are not familiar with the franchise, GTA is an action-adventure game that takes place in fictional cities modelled on real cities such as Los Angeles, Miami and New York. The latest entry in the franchise, GTA V, is the most successful video game in the last ten years, selling more than 150 million copies and generating close to $8 billion revenue, without taking into account GTA Online revenue.
In our view, the development time for GTA VI (probably close to 10 years) and the evolution of GTA online over the last few years suggest that GTA VI could have all the attributes of a major Metaverse world. Indeed, GTA VI could put players/users in a massive, real-world environment made of one or several major cities. And as these cities will be photo-realistic, it’s not hard to imagine that developers will include highly interactive places and activities so that users spend as much time as they can in the GTA virtual world, meeting friends in a virtual bar, visiting a virtual store to purchase virtual goods or attending an artist’s virtual performance…
In all, GTA could soon be much more than a video game and become an online destination where people socialize, shop and have fun, à la Fortnite or Roblox.
Even if it’s a bit early to model potential new revenue streams deriving from the transformation of GTA into a virtual world (advertising, e-commerce, NFTs…), the financial implications of GTA VI are going to be massive over coming years for Take-Two. In FY25, it looks like the company assumes a $2.5 billion contribution from the title (or close to 40 million shipments), in line with our previous expectation (“close to $3 billion revenue”). But additional sales of GTA VI and online content in subsequent years should sustain revenue growth and take non-GAAP EPS towards an $8-10 range (vs. $3.5 in FY23). The stock’s PE multiple would then fall to 13-15x in FY25 and following years.
Overall, we are in the early stages of a new product cycle that will fuel revenue and earnings growth in the gaming industry. The potential monetization of Metaverse opportunities could give another boost to the industry’s top-line, while Generative AI could materially cut development times and costs.