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In today’s Power Profit Trades newsletter, I want to discuss a great opportunity that I have researched for a lower risk/higher payout in one of the biggest growth markets in the US and around the globe… electronic games.
Electronic Games, Not Child’s Play
Last year, when the virus mess sent folks home for work and just about everything else, electronic games became one of the go-to sources for entertainment and distraction from cabin fever, as well as just plain old entertainment.
Kids, of course, have enjoyed electronic games for years — but increasingly, adults are getting in on the game.
And primary providers of console and online games have been reacting well to the growth in adult players, with subjects that cover the range from more adventurous escapades that are far from real life, to playing virtually in the big leagues for major sports, including basketball, football and more.
The stay-at-home developments really empowered gaming companies to garner new customers, as well as broadening their sales to existing bases — and this has resulted in double-digit revenue gains for the leaders in the gaming market.
So, this market is far from just child’s play – it is big business that’s only getting bigger even as we all get to leave the house – as gaming has captured a bigger market for more profits… and that isn’t going away, even with normalcy returning to our lives.
The Console Champion
There are plenty of game companies in the market – but the best have focused not just on one-off games – but a series of games.
Think of these as movie sequels. Movie studios have quickly recognized that by identifying characters and plot lines that can evolve and develop, films can be launched with sequels already in the works.
This allows movie studios to capitalize on marketing budgets from the successful initial movie that, in turn, can be used again and again for the next chapters in the series of sequels. And it can lock in writers, producers and even characters into longer-term contracts, bringing additional business certainty and even cost savings over time — including for marketing efforts and campaigns.
Game companies have adopted and adapted this sequel process with rollouts of updated games and story lines that compel customers to buy the next generation of games to keep up with the characters and plot lines that they’ve been enjoying in earlier games.
And if they are successful, it bakes in a steady stream of recurring revenue for the new games in each of its franchises.
Take-Two Interactive Software (TTWO) is one of the masters of this recurring revenue model of games. It has a series of serial storyline games that appeal to various customer bases, including its massively successful Grand Theft Auto series, as well as its Borderlands and Sid Meier’s Civilization, amongst its primary titles.
And it has professional and other sports increasingly on offer with updated players and locations for Major League Baseball (MLB), the National Basketball Association (NBA), and other major sports.
Its focus has been primarily on consoles for games. And it has contracts for its games to be used by the primary companies including Microsoft (MSFT), Sony (SNE), and Nintendo (NTDOY), as well as others.
And as these companies have their own sequels for consoles, customers of Take-Two also will naturally buy the latest versions of its games that are tailored to work on the latest, newer consoles on an ongoing basis.
This combination of serial/sequel games and updated games for new consoles continues to drive revenue gains for Take-Two.
Take-Two Interactive Revenue – Source: Bloomberg
Revenue for the company continues to grow year in and year out, with the past trailing 10 years seeing annual gains running at 14.13% on a compound annual growth rate (CAGR) basis.
This is big for not just the company, but its investors that can depend on it to deliver quarter after quarter and year after year.
The Next Step for Take-Two
Just as the company has been learning how to maximize its business model of games with sequels and upgraded console sales — it has also been learning from the past year’s evolution in games and gaming.
While game consoles are getting lighting quicker with massive additional storage for data, having the ability to play with others on different platforms and consoles has been a limiting factor for Take-Two.
So, the next generation move for the company is to move to the alternative of using PCs and other non-console platforms. This is allowing a greater number of new and potential customers — that want to play its games — but don’t want to lock themselves into particular consoles. And with chip shortages, they don’t have to wait to be able to get access to newer consoles.
This is now the next level for Take-Two to further level-up for its existing games and sequels, to drive even more revenue gains and profits for the coming quarters.
The company’s margins are already high at 20.10% — but without having to manufacture and distribute cartridges, the margins should rise much, much higher.
This is now setting up the next level for TTWO stock right now, as traders begin to bake in the better performance for the company and its stock for the current and coming quarters.
Take-Two Price – Source: Bloomberg
The stock price sold off with many of the technology stocks recently — but that is setting up a potentially great bullish trade for us right now.
Sales are strong, and as noted, operating margins will be strongly improving, which will drive earnings above estimates, with the big move for non-console delivered games to an ever-eager market.
Add amidst the rebound in the stock market — including for technology stocks, as the virus mess begins to come back under control with more information on the latest variant — we have a great trading opportunity right now for a quicker and safer trade for our Money Calendar Pro subscribers.
I put a bullish call debit spread trade together to start this week for Take-Two that, like the other trades for Money Calendar Pro, is set for lower investment/quicker returns and safety all combined.
This set up a trade that, as of last night, was poised for a nice profit in the making for my Money Calendar Pro members. (For more info on this strategy, call our VIP Team at 1-888-384-8339!)
The Trade to Game the Market
Our Money Calendar Pro trade consisted of buying to open a near-term call on TTWO, at a strike just a couple of dollars above the current market price for the stock.
But for the safety of the trade and to reduce the cost of the trade, we also limited risk by simultaneously selling to open a call option a few more dollars above the sold call strike, to provide an offsetting credit to reduce the cost of the overall bullish trade on TTWO.
This is called a call debit spread, and it’s an alternate way to bet bullishly on a stock or ETF, without taking the full risk and cost of buying the stock or paying fully for just a call option.
Instead, by buying one call option at a strike price above the current stock price and selling to open another call at a higher strike price – you get to capitalize on the near-term upside for the stock at a lower net cost by giving up some of the potential reward on a rally.
Specifically, while the higher-strike sold call limits risk, it also limits the potential gains on a move above the strike price from the stock.
So, kids, that’s your Power Profit Trades lesson for today! Be sure to keep an eye on TTWO, and again, tune into this morning’s Power Profit Trades session at 9:30 a.m. ET right here!
In fact, later this week, I’ll discuss how I’m setting up the trade of the century for you…
Make sure you’ve marked your calendar for my SPECIAL LIVE SESSION this Thursday, Dec. 9, when I discuss the most important developments for the cryptocurrency market.
Have a great week!
Tom Gentile
America’s #1 Pattern Trader
