Here’s What To Make Of Take-Two’s (NASDAQ: TTWO) Acquisition

Shares of video game maker Take-Two (NASDAQ: TTWO) have had their busiest few days in nearly three years this week as the bulls and the bears slugged it out to see where shares will go next. They’ve had a rough enough start to the year, falling as much as 25% at one point into the start of this week. The main driver behind the selling has been the news on Monday of the company’s decision to acquire Zynga (NASDAQ: ZNGA), the social and mobile game developer, for $12.7 billion.

Management positioned the move as one that will expand Take-Two’s footprint in the mobile gaming market, and give them access to the fastest growing segment of the interactive entertainment industry. The team at Wedbush were quick to call the it a “very astute move by Take-Two, since Zynga is big and growing with excellent management. Take-Two has a history of being a hands off manager, so Zynga should continue to do its thing and the combined companies should recognize pretty significant synergies."

Lackluster Response

But while Zynga shares jumped 50% on the news, shares of Take-Two fell as much as 15% on Monday alone before recovering some ground into the close. Wall Street has had a few days to digest the news since then, and it’s starting to look like Monday’s drop was an overreaction. Already the stock is up 15% off the lows of the week, and some fresh analyst upgrades are starting to hit the headlines. 

Yesterday morning saw the team at BMO Capital Markets moving the stock to an Outperform rating, with analyst Gerrick Johnson noting that the Zynga acquisition is likely to "smooth earnings variability" while also offering "compelling" synergy opportunities. In a note to clients he added "Take-Two owns some of the most iconic video game properties, yet has underleveraged these properties onto mobile," Johnson wrote in the note. "We believe Zynga provides the capabilities to do so. Furthermore, we have been impressed by the ongoing strength of "Grand Theft Auto," which continues to drive stronger than expected engagement."

His $180 price target on Take-Two stock suggests there’s upside of close to 20% to be had from Wednesday’s closing price, and were shares to hit it they would be back at their pre-acquisition news level from December. KeyBanc Capital Markets also moved their rating on Take-Two from Sector Weight to Overweight, with a $185 price target. 

Getting Involved

However, for investors considering getting involved on the back of these upgrades, it’s worth pointing out that not everyone on Wall Street shares this level of optimism. While the bulls will be happy to have two new voices in their camp as shares fight to win back the lost ground, the bears can give MoffettNathanson a jersey. They downgraded their rating on Take-Two stock on Tuesday, saying the acquisition came as a "surprise" to the investment firm, and caused concern about the company's organic growth.

Analyst Clay Griffin brought his rating down to Neutral, but interestingly kept his price target at $170 which suggests even he thinks Monday’s drop to $140 was an overreaction. He’s been a long term fan of Take-Two, and noted how the company has always been about organic growth and “using its new and existing intellectual property to drive revenue and earnings.” But the acquisition of Zynga is now seen as a threat to that. 

In a note to investors, he said "and with such a departure for Take-Two, it’s impossible to not be concerned about the health of the original thesis: that an expanded pipeline of games, predominantly from its core competency (and stable of IP) in AAA console/PC titles, would lead to margin expansion and superior cash flow growth. Perhaps that piece is still intact, but perhaps it’s not. It is, though, now part of a bigger, and undeniably different story."

It remains to be seen which side will win out in the near term, but over the longer run you have to be thinking that Take-Two is only going up. They own some of the most popular gaming titles out there, and effectively share a massive addressable market with only one close competitor, Activision (NASDAQ: ATVI). This acquisition is much more likely to do good to their future growth than harm it.