Since mid-February, when Take-Two Interactive (NASDAQ: TTWO ) reported fiscal third-quarter earnings that included weaker-than-expected quarterly guidance, Take-Two stock has been trading close to its 52-week lows.
Source: Via Rockstar
Investors ignored strong demand for the company's hot games like Dead Red Redemption, Grand Theft Auto, and NBA 2K. Instead, they worried about rising operating costs and potential competition from the free-to-play titles. Is the selling of Take-Two stock overdone?
TTWO reported strong Q3 revenue growth. Its net revenue rose to $1.25 billion, up from just $480 million last year. The company's net income soared to $179.95 million, up from $25.14 million during last year's Q3. Its total net bookings grew an impressive 140% to $1.57 billion, setting a new quarterly record and beating management's guidance range of $1.4 billion to $1.45 billion.
Both Red Dead Redemption 2 and NBA 2K19 performed well in Q3. Digitally-delivered net bookings also surged, jumping 85% to $704 million and setting a new quarterly record for the company.
But on the cost side, selling and marketing expenditures rose to $161.32 million, up from $79.5 million. Overall operating expenses rose 46% to $299 million. And that cost increase is getting investors nervous. To ensure that its core game titles and new mobile game initiatives generate strong revenue, Take-Two must advertise even more than before.
Healthy Balance Sheet
Take-Two ended 2018 with $1.6 billion in cash and short-term investments. With healthy operating cash flow of $587 million, up 188% year-over-year, TTWO had plenty of investment options. It spent $109 million to buy back 1 million shares of Take-Two stock. The good news is that the buyback will give the company's EPS, and Take-Two stock, a lift. The bad news is that TTWO paid an average cost of $109 per share of Take-Two stock. With Take-Two stock trading around $89, TTWO will have a paper loss on the purchases until TTWO stock recovers.
The Outlook of Take-Two Stock
Helped by the strong performances of WWE 2K19 and XCOM 2 , TTWO raised its full-year fiscal 2019 outlook. But, partly due to higher marketing expenses, the company's profits will come in slightly below expectations in Q4.
Take-Two raised its full-year net-bookings guidance to a range of $2.89 billion to $2.94 billion. But its cost of goods sold will be between $921 million - $931 million, due to higher marketing, hiring of new employees, higher IT expenses, and increased R&D costs.
Other Headwinds for Take-Two Stock
The company's guidance for a decline of revenue from GTA Online upset the Street. Analysts assume that competition from free-to-play games, led by the very popular Fortnite , will hurt Take-Two's sales. Not only is Fortnite free, but it offers very good gameplay.
Take-Two's management continues to believe that its customer base is willing to buy its games. Consequently, TTWO is not looking to employ a subscription model or switch to offering only free games. Still, TTWO offers Red Dead Online Beta at no cost with the purchase of the game. Social Point,Dragon City , and Monster Legend s are other free-to-play games made by TTWO.
Although worries about Fortnite have hurt Take-Two stock, the company believes that as long as it offers solid quality and satisfying gaming experiences, its customers will keep coming back.
The Valuation and Bottom Line of TTWO Stock
Overall, analysts continue to rank TTWO stock a "buy" with an average price target on Take-Two stock of $124.88.
Trading with a forward price-earnings ratio of 18 and near its yearly lows, Take-Two stock clearly isn't inspiring much hope among investors. With TTWO stock trading at these levels, the market isn't putting any value on the company's 2020 growth prospects. By then, its sales growth may accelerate as its online games start to gain traction and its core titles rake in higher revenue.
As of this writing, the author did not hold a position in any of the aforementioned securities.
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