Take-Two Interactive Software Is Going Ballistic

A Surprise That Is No Surprise

Anyone not expecting Take-Two Interactive Software (NASDAQ:TTWO) to produce surprisingly strong results for the calendar 2nd quarter hasn’t been paying attention. The pandemic sparked a shift to digital that includes entertainment; In general, the analyst’s consensus for the quarter and the year is too low and results from competitor Electronic Arts (NASDAQ:EA), released just last week, foreshadowed strength in Take-Two Interactive. I admit there was some risk going into the release, there’s always a chance for unexpected news, but the evidence was pretty clear and it was confirmed by the actual results.

Net revenues, money the company earns through direct sales of its products, grew 54% on a YOY basis to $831.3 million. Of that, oh so important recurring revenue grew 52% YOY to account for 58% of the net. Bookings, the total value of the company’s business including ad revenue, licensing fees, merchandise, and in-game advertising grew 136%. That’s 136%, more than double, and it exceeds consensus by 17% or 1700 basis points. That’s some strength.

On the bottom line, Take-Two Interactive reports GAAP earnings of $0.77. That’s the only bad news. The company missed consensus by $0.41 but that doesn’t matter. Not only did net bookings, an indicator of future net revenue, increase to a record high but so did cash from operations and unrestricted free-cash-flow. Cash from operations increased 310% and free-cash-flow 595% proving the company’s ability to generate value for its shareholders.

Take-Two Interactive Software Guidance Is Raised, The Analysts Are Gushing

Company execs felt confident enough to raise the guidance for the full-year despite the shortfall in earnings. The new target is $2.8 to $2.9 billion in bookings and net revenue with net income in the range of $349 to $380 million. Both ranges are above the previous consensus targets and already sparking commentary from Wall Street. Three key analysts raised their price targets and all three see this company riding out the pandemic and emerging stronger than before.

Keybanc’s Tyler Parker set the high-price mark of $193. According to him, the H2 outlook is conservative and leaves room for upside barring a material slowdown in the gaming market. Morgan Stanley’s Brian Nowak raised his target to $176 saying he expects gaming trends to remain strong in the second half. The longer-term outlook at Morgan Stanley has shares of TTWO hitting the $210 mark on strength in core trends. Bank of America’s Brian Greene also upped his target but downgrade the stock to neutral citing valuation relative to its competition.

On a valuation basis, Take-Two is trading well above its competitors at 45X forward earnings. Electronic Arts is trading closer to 26X forward earnings while Activision Blizzard is a slightly higher 31X earnings.

Looking forward, there is another catalyst in the wings waiting to boost sales for the entire video gaming industry. Both the Playstation 5 and Microsofts Xbox Series X are slated for release during the upcoming holiday season.

Take-Two Interactive Software Technical Outlook: Going Ballistic, But Not Too Late To Buy

Shares of Take-Two have been moving higher since March with a notable acceleration in upside momentum over the last month or so. The Fiscal Q1 report confirmed what the market expected and sparked a surge in prices that has the stock going ballistic. The move is supported by the outlook but investors are urged to be cautious. With share prices trading so far above the 30-day moving average and forming a price gap today there is a real chance this stock could correct or consolidate before moving substantially higher.

The candle formed in early price action is bearish, to say the least. The candle is large, red, and forming what could become a powerful Shooting Star if the bears decide to follow through on today’s profit-taking. The bad news (good news?) is that price action could fall to $168 or lower in the near-term. The good news is that MACD and stochastic are convergent with the freshly set high so we can expect it to be retested if not exceeded sometime in the not-too-distant future.