Take-Two Interactive (NASDAQ: TTWO) Moves Back From The Brink

Video-game maker Take-Two Interactive (NASDAQ: TTWO) had been having a run of very poor form before their fiscal Q4 earnings were released this week. Since hitting an all-time high in January of 2021, they’ve only gone down since, a full 50% to be exact, with any hint of a rally in the meantime snuffed out by resilient bears. 

So it will come as a great relief to investors, and as great interest to those of us on the sidelines, that the company was able to register a solid beat in their latest report. It was released after the bell rang to end Monday’s session, and showed EPS coming in at $0.95, more than 50% higher than what analysts had been expecting. Revenue for the quarter was also ahead of the consensus and up more than 18% year on year, which helped mask the small miss seen in their bookings number. From a game perspective, among the biggest revenue contributors for the quarter were NBA 2K22 and NBA 2K21, Grand Theft Auto Online and Grand Theft Auto V, and Red Dead Redemption 2 and Red Dead Online.

Bullish Comments

Strauss Zelnick, Chairman and CEO of Take-Two, spoke bullishly about the results, noting that “our strong fourth quarter results concluded another highly successful year for our Company, during which we delivered Net Bookings of $3.4 billion. In addition to our outstanding financial results, I am pleased that we took pivotal steps to position our organization for the long term by investing in talent, broadening our portfolio further, and agreeing upon our transformational pending combination with Zynga, which has the potential to exponentially increase our Net Bookings from mobile, while also enabling us to deliver substantial cost synergies and revenue opportunities.”

The mention of Znyga was timely, as the company expects to complete the acquisition sometime in the next week or two. Despite the tough year, and then some, that investors have had to endure, Zelnick is optimistic about what the future holds. He said that “as we execute on our organic growth initiatives, while unlocking new opportunities presented by our pending transaction with Zynga, we believe that we can broaden our portfolio and capitalize further on new platforms, business models, emerging markets, and distribution channels. As we deliver on these growth drivers, we believe that Take-Two remains incredibly well-positioned to increase its scale and prominence in the industry, expand its margins, and deliver long-term value for our shareholders.”

Wall Street clearly bought into the recovery story as Take-Two shares jumped in the aftermath of the release. They’re currently up 20% from the lows of last week, which for context were within touching distance of the lows they touched during the initial COVID sell-off in 2020. The team over at Jefferies reiterated their Buy rating and $231 price target, which implies there’s a huge upside of some 90% to be had from where shares closed on Tuesday. Andrew Uerkwitz wrote in a note to clients that "we remain bullish as the next three years should see the content pipeline come to fruition, expanding margin structure, and the Zynga acquisition providing diversification.” 

Big Upside

Stifel has kept Take-Two on its Select List of ideas, and like Jefferies, says the pipeline is key to its thesis. They felt the numbers from the quarter were mixed but reflected "a slightly better FY2023 guide relative to expectations, leading us to make modest upward adjustments to our recently reduced estimates."

Truist is also maintaining its Buy rating based on Take-Two’s “multi-year pipeline (headlined by an upcoming Grand Theft Auto), valuation (strong balance sheet/cash conversion), and industry trends (favorable seasonality, consoles cycle/pricing tailwind, consolidation)."

For a company that was about to have its name join that toxic list of stocks that are now trading below their COVID lows, this has to feel like they’ve been pulled back from the brink. Investors getting involved have a clear line of defense at the $100 level to work an entry and stop loss around, while to the upside there’s a lot of room to go before they’ll encounter resistance. Video game sales might be in a multi-month slump, but the risk-reward profile of Take-Two is too good to pass up on right now.