Will Take Two Stock Go Up?

Take-Two’s shares have marginally outperformed the S&P 500 index over the past year but with the stock falling after Q3 earnings results were reported, is it an attractive investment following the acquisition of Gearbox? 

Game developer Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is known for its popular franchises such as Grand Theft Auto (GTA), NBA 2K, and Red Dead Redemption.

With a long history of successful mergers and acquisitions, the company has placed itself as one of the leaders in the gaming industry.

The stock has climbed 28% over the past year and hit a 52-week high of $171.59 per share on February 8, 2024, the day it released its results for the fiscal third quarter. However, it fell thereafter and has gone on to lose more than 10% of its value following disappointing financials results. So what does the future hold, will the stock go back up?

Top Line Bad, Bottom Line Better

In the fiscal 2024 third quarter, Take-Two’s top line dropped by 2.9% versus a year ago to $1.37 billion.

Nevertheless, the company’s bottom line improved. The loss for the quarter was $91.60 million or $0.54 per share, a narrowing from the prior-year quarter’s loss of $153.40 million or $0.91 per share.

The all-important gross profit margin came in at 49.6% during Q3 2024, a slight decline from 50.9% in Q3 2023.

In terms of reserves, Take-Two’s cash and cash equivalents stood at $898.70 million, up 8.6% from $827.40 at the end of December 2022.

Net bookings of $1.30 billion exceeded management expectations and were majorly driven by GTA 5, GTA Online, and the Red Dead Redemption series.

However, as a result of softening in its mobile advertising and sales for NBA 2K24 during the third quarter, alongside further anticipated marketing expenses during the upcoming quarter, the company slashed its fiscal year 2024 outlook.

Weak Guidance Rattles Investors

For the fiscal fourth quarter ending March 31, 2024, management anticipates total net revenue to range between $1.32 and $1.37 billion.

Net losses of $153 to $170 million are projected while non-GAAP EBITDA of between $33 to $55 million is expected.

For FY24, management now foresees total net revenue to range between $5.27 and $5.32 billion and capital expenditures of approximately $150 million.

Net bookings are expected to range between $5.25 to $5.30 billion, and non-GAAP EBITDA to be in a range between $313 and $334 million. The company expects to report a loss of around $1.0 billion.

While the expected revenue for the fiscal year is almost flat compared to the previous fiscal year, the quarterly number implies a decline.  

More than the company’s average third-quarter financials, weak guidance for the fourth quarter and fiscal 2024 concerned investors and sparked a share price decline. 

Will Gearbox Acquisition Ignite Take Two?

Even since its inception back in the 1990s, Take Two has been highly acquisitive, purchasing several publishers and developers.

The firm’s acquisition spree continued on March 27 when Take-Two announced plans to acquire The Gearbox Entertainment Company in an all-equity deal worth $460 million. Gearbox, an award-winning developer of industry-defining entertainment experiences, is known for its Borderlands Franchise.

The acquisition is expected to be closed by June 30, 2024, and will expand Take-Two’s internal development team and facilitate development related to the Borderlands series. This is by no means comparable to its acquisition of Zynga in 2022, which significantly boosted its presence in the mobile gaming market.  

While Take-Two’s CEO emphasized that this acquisition could lead to substantial opportunities for long-term growth and enhance the company’s financial profile, investors didn’t find it to be a compelling reason to invest in the stock. As a result, shares remained almost flat after the news release.

Will Take-Two Stock Go Up?

A majority of analysts, 14 out of 19, recommend buying Take-Two stock, and no Sell ratings exist. The consensus forecast projects the stock will rise by nearly 15% from the current level to hit a price of $177.53.

A primary reason behind the bullish sentiment stems from the launch of GTA VI next year, which should strengthen revenues.

Meanwhile Take-Two stock has lost some of its value due to weak guidance for the current fiscal year. It also looks expensive at a forward price-to-sales of 5x. The multiple is not only significantly higher than its industry peers but also exceeds its own 5-year high by 5%.

It looks like investors will want to see more positive developments before buying the stock at this premium level.  

While there are no reasons to take a bearish stance on its shares yet, there is nothing impressive happening with the stock that makes the case strong for investing in the stock. At least, the Gearbox acquisition may not be a good reason.

The Bottom Line

To sum up the pros and cons of an investment in Take Two, the pluses are that analysts forecast the company will be profitable this year, a contrast to the performance over the last twelve months when it was in the red, and the return over the past decade has been very strong.

The negatives include its current high multiples, for example, its high EBITDA multiple and lack of a P/E ratio given the dearth of earnings. So too is the stock trading at a highly elevated revenue multiple at this time.

When you weigh up the short-term obligations versus liquid assets, and existing debt levels with the other pluses and minuses, Take Two isn’t a compelling buy at this time but it’s definitely a watch and see candidate.

Given the company’s long-term track record to ratchet up shareholders gains, the momentum is on its side over the long haul and it’s certainly not a company to bet against.

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