After a 70% rise since the March 23 lows of this year, at the current price of around $170 per share, we believe Take Two Interactive’s stock (NASDAQ: TTWO), a gaming company best known for its popular franchises such as Red Dead Redemption and Grand Theft Auto, has reached its potential. TTWO stock has moved from $100 to $170 off the recent bottom compared to the S&P which moved 56%, with the resumption of economic activities as lockdowns are gradually lifted. TTWO stock is now up 48% from the levels it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Furthermore, TTWO stock is also up 62% from levels seen in early 2018.
Some of the 62% rise of the last 2 years is justified by the roughly 72% growth seen in Take Two Interactive’s revenues from fiscal 2018 to 2020 (fiscal ends in March). Also, the company managed to expand its Net Margins by 35% from 10% to 13%, which translated into a 128% growth in earnings. However, its P/E Multiple has contracted. We believe the stock is unlikely to see more upside after the recent uptick and the potential weakness from a recession driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 62% Change in Take Two Interactive’s Stock between 2018 and now?‘, has the underlying numbers.
Take Two Interactive’s P/E multiple changed from 65x toward the end of 2018 to 41x in late 2019. While the company’s P/E is 47x now, there is a potential downside risk when the current P/E is compared to levels of 41x seen as recently as late 2019.
So what’s the likely trigger and timing for the downside?
The global spread of coronavirus has meant increased restrictions on the movement of people. This is positive for gaming companies, such as Take Two Interactive, due to increased demand for gaming, given that more people are confined to their homes, eschewing more public forms of entertainment. But Take Two Interactive’s stock beyond Covid-19, has more to look forward to. Over the next few years we expect continued growth in the company’s revenues and earnings, led by increased demand for games after the expected launch of newer generation consoles in the 2020 holiday season. Some of the games, such as NBA 2K20 have been doing well of late, and it also plans to launch new titles under its Grand Theft Auto franchise.
That said, much of these factors are likely already priced in the company’s current stock price. While Take Two Interactive’s near term results will be strong, investors will focus their attention on fiscal 2021 results and beyond. The company has guided for earnings of $3.30 per share in fiscal 2021, and at the current price of around $170, TTWO stock is trading at 51x forward earnings, which is higher than the levels seen in recent years, implying the stock is vulnerable for downside in the near term.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.