Heading into this week, of the major U.S. video gaming stocks, Take Two Interactive (NASDAQ: TTWO ) had done best recently. But that's hardly an accomplishment, as the whole sector has gotten walloped. Wednesday's dismal trading action did nothing to change that perspective. After years of outperformance, investors are reconsidering just how strong the runway is for gaming stocks going forward.
Yes, the transition to subscription and micro-payment revenues has caused rising fortunes in the industry. But a lot of the easy pickings are already out of the way. What will drive further growth going forward?
Well, for TTWO stock in particular, it has the strongest lineup of blockbuster games at the moment. R ed Dead Redemption 2 became one of the fastest-selling games of all time, blowing away the estimates for its launch. On top of that, Take Two has more highly anticipated offerings coming up.
TTWO Stock: Analysts Vs. Investors
I suspect that many investors have been nervous to get back into TTWO stock. Due to the dreadful performance of video gaming stocks lately, it feels risky. I understand that sentiment. However, with all three major competitors down at least 10% on Wednesday, the relative valuations here have hardly shifted. Take Two was the best option heading into earnings, and, having had a decent report - stock performance not withstanding - it should come out of this correction the strongest.
Almost all signs were pointing upward for Take Two heading into Wednesday's earnings report. Analysts were piling on board. At least six different investment banks have either raised their guidance for earnings this quarter or freshly rated the stock a buy within the past month. And the analysts weren't wrong. Take Two topped revenue guidance, bringing in $1.57 billion against the $1.5 billion consensus estimate.
What had the analysts so excited for TTWO stock heading into earnings? There was one main reason for enthusiasm. The long-awaited Red Dead Redemption 2 launch exceeded expectations. And, as it turns out, the company beat even analysts' already-rising expectations. Let's see what the analysts said.
Take Two's Positive Momentum
Colin Sebastian of Baird kicked things off in early January by reiterating his outperform rating and $145 price target for TTWO stock. However, he raised his EPS guidance for the quarter citing strong and sustained engagement and sales of Red Dead Redemption 2 . Shortly thereafter, Stephens launched coverage of TTWO with an outperform rating and a $138 price target. Gabelli followed the next week, relaunching coverage on Take Two with a $136 price target.
Deutsche Bank followed that up by starting its coverage of the big gaming stocks. It gave Take Two a big vote of confidence, giving it the only buy rating of the three leaders. While suggesting that TTWO stock is a buy, Deutsche said that both EA (NASDAQ: EA ) and Activision Blizzard (NASDAQ: ATVI ) were mere holds. It prefers Take Two due to its faster growth rates.
Heavyweight Goldman Sachs came to a similar conclusion as Deutsche Bank. It also issued ratings for the gaming companies. Goldman has TTWO stock and Zynga (NASDAQ: ZNGA ) as buys while it views EA and Activision as holds. Goldman specifically likes that Take Two has other near-term catalysts in the pipeline. For example, these include the launches of Borderlands 3 and the latest outing of Grand Theft Auto. Activision, their analyst argued, lacks a compelling new release prior to Diablo 4, which is several years off.
Take Two Is a Takeover Target
We haven't heard that much about video games stocks as potential takeover targets lately. Perhaps due to the large players all being in the same league in terms of size, it's not especially likely that any of the big three U.S. names would want or be able to acquire another one.
However, there could be another suitor. Brandon Ross of BTIG joined the group of analysts excited for Take Two stock. Monday, he suggested that big tech companies including Microsoft (NASDAQ: MSFT ), Amazon (NASDAQ: AMZN ) or Alphabet (NASDAQ: GOOG , NASDAQ: GOOGL ) will want to buy one of the large gaming shops. Microsoft seems particularly logical, given their Xbox platform. But it's quite conceivable any of those tech titans could make use of a video game makers data, loyal fanbase, and increasingly subscription-based revenues that Wall Street loves so much.
In particular, Ross cited Take Two as the best takeover target of the major gamemakers. Ross stated that Take Two is the best candidate "given it is both digestible and has perhaps the best AAA content in the world," Like the other analysts, he is enthused about Red Dead Redemption 2 sales and the potential for huge ongoing revenues from its online experience.
He is also one of the most bullish on TTWO stock heading into earnings; he has a $142 price target.
TTWO Stock Verdict
There is a great deal of concern around the gaming stocks. This week's developments won't help sentiment either. Take Two came up short of investors' lofty wishes, despite topping analyst guidance. Additionally, on Tuesday, after the bell, EA announced a lousy quarter, sending the stock sharply lower. Activision stock also dropped 10% on Wednesday in sympathy with its peers.
Investors have had high expectations for the sector, and there has been some painful readjustment to those outlooks in recent months.
However, of the bunch, TTWO stock looks the most attractive. Activision still has to report earnings, and analysts are already downbeat there. EA released a much worse quarter than Take Two. And of the three, Take Two still has the best outlook for the rest of 2019. With the stock now down 50 points from the highs, this is an interesting opportunity for investors wanting to buy into the gaming sector.
At the time of this writing, Ian Bezek held no positions in the aforementioned securities. You can reach him on Twitter at @irbezek.
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