In the past year, the video game industry has benefited from COVID-19 shutdowns and social distancing measures. This has boosted the share prices of many leading video game developers, including Take-Two Interactive (TTWO), which is up more than 72% in the past twelve months.
Best known for its Rockstar Games label (the publisher behind the Grand Theft Auto franchise), Take-Two owns other valuable video game franchises as well, including BioShock and NBA 2K.
While smaller, it’s a formidable competitor to its peers, Activision Blizzard (ATVI) and Electronic Arts (EA). But while the past year has been a banner one for Take-Two, will it continue to outperform going forward?
Investors have cooled on TTWO stock in recent months. Since the start of 2021, shares have dipped from around $202 per share to around $196 per share, even as the company has continued to beat expectations, as evidenced by its recent quarterly earnings release.
To some, the stock may look overvalued, and with zero earnings growth expected for 2021, it’s clear why investors aren’t willing to bid it up further. However, with many factors pointing to another year of better-than-expected results, it might be time to take advantage of this stock’s recent weakness.
TTWO Stock: Solid Results vs. Premium Valuation
For the quarter ended Dec. 31, Take-Two beat on earnings ($1.57 per share versus consensus estimates of $1.12 per share). Net bookings of $814.3 million also came in well above sell-side estimates of $757.5 million.
With its franchises performing better-than-expected, the video game publisher has raised guidance for the fourth quarter (ending Mar 2021). So, with such solid results, why is TTWO stock trending lower instead of heading higher?
Valuation concerns may be a factor. As the video game sector boomed in 2020, investors bid up names across the board to levels that, at first glance, mght not look sustainable. For example, Take-Two currently trades at 32.5x estimated 2021 earnings.
However, current sentiment pegs last year’s performance as a one-time event. Instead of another blockbuster year, analysts expect Take-Two to post zero earnings growth in the coming fiscal year.
Having said that, Take-Two’s near-term prospects don’t hinge on COVID-19. Rather, factors outside of the pandemic could help boost results over the next twelve months.
3 Factors Working in Take-Two’s Favor
Investors may see TTWO stock as a name that will underperform as COVID-19 enters the rearview mirror. However, outside of the pandemic, there are three factors that could drive better-than-expected results.
First and foremost, industry-wide, video game sales are set to rise by double-digits annually through 2025. Second, the launch of new consoles last November will help bolster sales in the next few quarters.
Third, Take Two is launching 93 games over the next five years, with some of them coming from existing franchises like Grand Theft Auto.
Put all three together, and the company has a shot at exceeding today’s muted expectations. If earnings continue to grow, so will the price of TTWO stock.
What Analysts are Saying About TTWO Stock
According to TipRanks, Take-Two stock has a Moderate Buy consensus rating. Out of 18 Wall Street analysts, 12 give it a Buy rating and 6 rate it as a Hold. As for price targets, the average analyst price target comes in at $224.25 per share, implying around 14% upside potential from today’s prices. (See Take-Two Interactive stock analysis on TipRanks)
Investors today may expect flat results from Take-Two in the coming fiscal year. That’s understandable, given that the COVID-19 tailwind will largely be a one-time event.
Yet, as detailed above, with three non-COVID factors working in its favor, results could again exceed expectations. As its earnings continue to climb, so will its stock price.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.