‘Grand Theft Auto’ maker shares are a bargain in gaming segment

The Motley Fool Take

The video game industry has been steadily growing over the last several decades, and technological advancements such as mobile and cloud gaming should help it continue to do so.

This tailwind should benefit Take-Two Interactive, which owns one of the most-played titles, Grand Theft Auto V, and is investing aggressively for the future. The company has a deep pipeline of 62 new releases slated between now and fiscal 2024.

Demand for Take-Two’s games is trending higher. Bookings in the first quarter of fiscal 2022 were 68% higher than the same quarter two years before the pandemic. Meanwhile, Grand Theft Auto’s player base is more than three-quarters higher than it was two years ago, and NBA 2K saw 13% year-over-year growth in first-time spenders in the recent quarter.

During fiscal 2021 (which ended March 31), Take-Two hired 700 new developers and acquired several studios (such as animation studio Dynamixyz) as it laid the groundwork for more growth. The stock was recently off 15% from its 52-week high, making this a promising time to buy shares.

In fact, Take-Two has recently been one of the cheapest major gaming stocks on the market. It deserves consideration by long-term growth-stock investors. (The Motley Fool has recommended and owns shares of Take-Two Interactive.)

Ask the Fool

From S.J. in Ocala, Fla.: If I have some extra money, is it better to pay off my mortgage faster or invest it in the stock market?

The Fool responds: Paying off your mortgage early can be worthwhile, especially if you’re nearing retirement. But depending on interest rates and your risk tolerance, investing in stocks could be a more profitable move.

If your mortgage interest rate is, say, 4%, then any extra principal you pay off will save you 4% in interest payments — which is like earning a (guaranteed!) 4% return. Given the stock market’s long-term average annual return of roughly 10% — or, to be more conservative, say, 7% or 8% — investing in stocks is likely to outperform the 4% return.

Stock market returns can be volatile, but over long periods, most investors have done well. But don’t invest money that you’ll need within the next five years or so in stocks.

From L.B. in LaCrosse, Wis.: Where online can I look up historical P/E ratios?

The Fool responds: Past price-to-earnings ratios are helpful to get a rough idea of how overvalued or undervalued a stock might be. If Buzzy’s Broccoli Beer has a current P/E of 12, for example, and its P/E in the past has often been 16 or more, it’s looking undervalued. (That’s based only on this single metric, though; ideally, you’ll assess a variety of factors when you study a company.)

Several finance sites track historical P/E data. At Morningstar.com, for example, you can search for a company and click on its “Valuation” tab; that will show you the current P/E ratio (and other valuation-related measures), past years’ P/E’s and the five-year average P/E.

The Fool’s School

To be a great investor, you’ll need to understand financial statements such as a balance sheet. Here’s an introduction to it. (Note: If you want to grow wealthier through the stock market over time without learning much, you can do very well simply investing in a low-fee index fund, such as one that tracks the S&P 500 index.)

There are three main financial statements that publicly traded companies issue at least quarterly. While the income statement and cash flow statement present how a company performed over a period such as a quarter or year (calendar or fiscal), the balance sheet reflects the company’s financial health at one moment in time — often the end of a quarter or year.

A company’s balance sheet is like what you’d get if you tallied up all your assets (such as house, car, bank accounts and perhaps a wine or art collection) and subtracted your liabilities (mortgage, car loans, credit card debt and others), to arrive at your net worth. It has three main sections: assets, liabilities and shareholder equity. Assets, often on the left, are set equal to — or balancing — liabilities and shareholder equity, often on the right.

Assets may include such items as “cash and cash equivalents,” “investments,” “prepaid expenses” (such as insurance paid for ahead of time) and “property, plant and equipment.” Some other assets, though, are not quite as reliable. “Accounts receivable,” for example, reflects money from sales that the company hasn’t yet received — and may not receive. And “inventory” reflects cash tied up in materials that haven’t been sold yet, some of which may end up not sold.

Liabilities often feature both short-term and long-term debt. Debt is not necessarily bad, although it’s best to see relatively little of it. Another liability, “accounts payable,” represents invoices not yet paid. These can actually be helpful, if the company is delaying payments until they’re due and using the cash in the interim.

Finally, shareholder equity, the difference between assets and liabilities, is the portion of the company that its shareholders can claim.

My Dumbest Investment

From S.D., online: I invested a large sum in the electric commercial truck startup Nikola when it was around $40 per share. Well, the shares were recently around $11. It still haunts me today. I learned to never invest in just a story, but to look instead for companies that make money and will keep making money.

The Fool responds: That’s a great lesson. Companies with great ideas or stories can be very exciting, but they’re often unprofitable in their early years, and some never turn the corner. Other companies with deeper pockets may be able to take their good ideas and succeed with them, or a company may simply run out of funding before it’s able to fully execute its plans.

If you’re risk-averse, just stick with profitable, growing companies — ideally those with sustainable competitive advantages that give them an edge over rivals and help them keep winning. If you can handle some risk, you might spread your dollars across a bunch of potential gems, understanding that some will likely fail.

Nikola’s stock has been volatile, rising and falling on hope and doubt — and a scandal, too, regarding false statements from the now-former CEO. Not only has Nikola been posting annual losses in recent years, but those losses have also been widening. It has big plans for electric trucks — but so do major automakers.

Who am I?

I trace my roots back to San Francisco in 1853, during the Gold Rush, when a Bavarian immigrant opened a dry-goods store. Seeing that workers needed sturdier clothes, he worked with a tailor in the 1870s to develop “waist overalls” made from tough fabric with rivet reinforcements. Today, with a market value recently near $10 billion, I’m a global apparel giant, with brands such as Dockers, Denizen, Beyond Yoga and variants of my own name. I rake in about $4.5 billion annually. Since 1886, my logo has featured two horses trying to pull apart a pair of pants. Who am I?

Can’t remember last week’s question? Find it here.

Last week’s trivia answer: Alcoa