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For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. But as Peter Lynch said in One Up On Wall Street, ‘Long shots almost never pay off.’
In contrast to all that, I prefer to spend time on companies like Take-Two Interactive Software (NASDAQ:TTWO), which has not only revenues, but also profits. While profit is not necessarily a social good, it’s easy to admire a business than can consistently produce it. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
Take-Two Interactive Software’s Improving Profits
Over the last three years, Take-Two Interactive Software has grown earnings per share (EPS) like bamboo after rain; fast, and from a low base. So I don’t think the percent growth rate is particularly meaningful. Thus, it makes sense to focus on more recent growth rates, instead. Like a firecracker arcing through the night sky, Take-Two Interactive Software’s EPS shot from US$1.69 to US$3.24, over the last year. Year on year growth of 91% is certainly a sight to behold.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. While we note Take-Two Interactive Software’s EBIT margins were flat over the last year, revenue grew by a solid 35% to US$2.6b. That’s a real positive.
The chart below shows how the company’s bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Take-Two Interactive Software’s forecast profits?.
Are Take-Two Interactive Software Insiders Aligned With All Shareholders?
Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. That’s because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, small purchases are not always indicative of conviction, and insiders don’t always get it right.
We did see some selling in the last twelve months, but that’s insignificant compared to the whopping US$10m that the Director, Paul Viera spent acquiring shares. The average price paid was about US$133.93. Big purchases like that are well worth noting, especially for those who like to follow the insider money.
Along with the insider buying, another encouraging sign for Take-Two Interactive Software is that insiders, as a group, have a considerable shareholding. Given insiders own a small fortune of shares, currently valued at US$62m, they have plenty of motivation to push the business to succeed. This should keep them focused on creating long term value for shareholders.
While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. The cherry on top is that the CEO, Strauss Zelnick is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalizations over US$8.0b, like Take-Two Interactive Software, the median CEO pay is around US$11m.
The Take-Two Interactive Software CEO received total compensation of only US$43k in the year to March 2018. You could consider this pay as somewhat symbolic, which suggests the CEO does not need a lot of compensation to stay motivated. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of good governance, more generally.
Should You Add Take-Two Interactive Software To Your Watchlist?
Take-Two Interactive Software’s earnings have taken off like any random crypto-currency did, back in 2017. Better yet, we can observe insider buying and the chief executive pay looks reasonable. It could be that Take-Two Interactive Software is at an inflection point, given the EPS growth. For those chasing fast growth, then, I’d suggest to stock merits monitoring. If you think Take-Two Interactive Software might suit your style as an investor, you could go straight to its annual report, or you could first check our discounted cash flow (DCF) valuation for the company.
As a growth investor I do like to see insider buying. But Take-Two Interactive Software isn’t the only one. You can see a a free list of them here.Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.