Some gaming stocks have been on fire this year and Take Two Interactive (NASDAQ:TTWO) is no exception, rising by 51% year-to-date. By contrast, the S&P 500 has climbed 19.2% for the year, a remarkable performance but nowhere near what the maker of Grand Theft Auto and NBA 2K has posted.
Under its corporate umbrella, Take Two Interactive has blockbuster franchises like Rockstar Games, 2K, Private Division, and Social Point that span player demographics and genres to create widespread appeal and revenue diversification.
Recently, however Take Two disappointed investors by reporting bookings lower by 4%, representing an 8% underperformance compared to its rival Electronic Arts. So has TTWO share price plateaued and is it due for a slide, or is now the time to buy the bookings dip?
Why Has Take Two Interactive Stock Gone Up?
If gaming isn’t your bailiwick, you may think of it fondly in similar ways to how a computer user would buy MS Office on a disc and load it up. What turned Microsoft around under Satya Nadella was its move to adopt Cloud computing and so too has a similar transition been pivotal for Take Two.
Management didn’t get left in the dust when gaming evolved to include cloud, AI and virtual reality. Indeed, one of the reasons Take Two stock has gone up is because the company has embraced these new technologies. By so doing, it has maintained a competitive edge in an industry famously difficult to thrive in due to the ever-shifting landscape of preferences and tastes.
Another growth driver for the firm has been its expansion internationally, breaking into Asian markets and other regions. As it launches around the world, Take Two not only diversifies its revenue base but limits exposure to downturns in any given region.
Perhaps above all, though, is the company’s ability to consistently deliver a flow of content that engages users, both with new releases and updates to existing games. In so doing, Take Two has cultivated a loyal community around key franchises who promote content through word-of-mouth and online.
The fan base is an under-appreciated asset that sustains revenues and grows them over time because recurring spending from in-game purchases and downloadable content is key to the firm’s revenue model. Speaking of which, how has Take Two been performing financially?
Take Two Financials May Confuse You
Somewhat remarkably back in 2020 and 2021, Take Two reported some year-over-year revenue growth in some quarters that was unimpressive given how much attention gaming platforms generally enjoyed from consumers stuck at home.
The proverbial ship started to sail in the right direction over the past two years, however, with revenues up 62.4% in Q3 2022 followed by 55.9% and 55.5% growth in the subsequent two quarters. Indeed, it wasn’t until Q3 2023 that the top line took a backward step again, falling by 6.8% YoY to $1.299 billion.
Less impressive is the operating income line item that strung together six quarters in the black from Q4 2020 to Q1 2022 and then went on a run of six quarters in the red. It’s confusing because the tilt from profitability to losses is precisely the period when the stock went on a massive run higher.
Usually, a declining trend in earnings per share spooks investors but for Take Two no such behavior has been observed, yet.
The future may not be so rosy, though, and valuation provides a clue as to why.
Is Take Two Interactive Stock Undervalued?
The consensus among 24 analysts is that Take Two Interactive stock is marginally undervalued by 5.6% to fair value of $162.70 per share.
Running a discounted cash flow forecast analysis on Take Two paints a more pessimistic picture with intrinsic value sitting closer to $152.02 per share.
Perhaps as important as the analysts forecasts is the negative sentiment shift with 12 analysts revising guidance lower for the coming quarter.
What’s tricky for investors to rationalize now is how the financials don’t look especially attractive with revenues lower, operating losses piling up, and analysts lowering estimates and yet TTWO share price has been on a tear.
The answer to the conundrum is a pipeline of new releases that is full over the next 24 months and bookings are forecast to hit a staggering $8 billion over that time, too.
With revenues over the last twelve months coming in at $5.4 billion, the projections represent a staggering increase to the top line.
it has come at a cost however, investment in R&D has been expensive and cash levels have fallen from $1.6 billion plus $772 million in short-term investments in Q4 2020 to just $756 million and $45.1 million, respectively, in the most recent quarter.
Take Two Interactive is a good example of a stock that can easily confuse investors who look at nothing but the financials. It’s difficult to wrap your head around a series of ongoing losses and falling sales at the same time as share price is climbing rapidly.
The answer to the head-scratcher is that the present losses have been a function of investment in the future, and the pipeline of new games, almost 20 in total, are exciting shareholders who have jumped on board in anticipation of a huge spike in the top line.
For now, though, it seems that the good news is largely priced in with the share price and fair value pretty much side by side. Those who are sitting on the sidelines waiting for an opportunity may be best positioned to stay patient until price volatility creates a greater margin of safety.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.