Shares of video-game developer Take-Two Interactive Software (NASDAQ: TTWO), the firm behind such popular titles as Grand Theft Auto (GTA) V and Red Dead Redemption 2, have been back on the retreat in recent weeks. Thanks in part to a downgrade from Benjamin Soff, a Deutsche Bank (NYSE: DB) analyst, who cites a lack of material catalysts, Take-Two stock finds itself back below the $120 per share and at risk of retesting those $103-105 May lows.
Undoubtedly, the big downgrade was concerning. Though Take-Two is behind some of the most popular titles that boast impressive engagement years after their release, the time between such blockbuster releases is quite tough for shareholders to put up with.
Sure, Take-Two has so many intriguing titles to keep gamers entertained between releases of its blockbuster hits. However, it’s clear that the stock is in need of a true next-generation blockbuster to march materially higher.
Take-Two Interactive: Growth Beyond GTA and Red Dead Redemption
The next Grand Theft Auto game could be the material catalyst that sends shares much higher from here. However, the next big GTA title has been years in the making and could take a while longer before it’s ready for prime time. Indeed, it’s been such a long, painful wait for investors and gamers. In any case, Take-Two needs to diversify away from just a handful of hit titles by growing its other offerings to smoothen out the ride in the stock between multi-year blockbuster releases.
Fortunately, the acquisition of Zynga is a step in the right direction amid the broader consolidation of the gaming industry. Though the first thing that comes to mind with Take-Two is GTA, I do think the firm is more than capable of moving earnings higher, even without its smash hit.
Simply put, Take-Two is more than just a one (or two) hit wonder. Arguably, it’s one of the most attractive takeover targets in the entire video-game market, and with the metaverse approaching at some point in the future, Take-Two’s expertise with massive open-world environments could prove worth a premium price tag over its gaming rivals.
Though Take-Two may not have any major “material catalysts” coming over the near-to-medium term, I think the company’s longer-term capabilities and trajectory are being underestimated at current valuations.
At around $119 and change, the stock trades at more than 79x trailing earnings. Given the recent video-game slump that weighed on earnings, such a multiple is not indicative of a cheap stock. Still, the 2.1x book multiple remains well below the leisure products industry average of around 4.2x.
Take-Two’s Push into Mobile Gaming Could Prove Bountiful
Take-Two’s Zynga merger could make Take-Two Interactive a force to be reckoned with in the mobile-gaming space. Undoubtedly, mobile gaming may not be nearly as exciting for gamers who are pained waiting for the next big open-world game release. However, mobile gaming is the fastest-growing market in the gaming space.
Like it or not, mobile game revenue is slated to be worth north of $100 billion by 2023. This year, global smartphone games revenue is expected to come in at over $91 billion — around 45% of global game revenues.
Mobile gaming seems to be the place to go for growth, and I think Take-Two stock could re-excite investors, as such a push is unlikely to take away from its ongoing GTA efforts.
Though the mobile-gaming market is hot, Take-Two is unlikely to have anything meaningful coming out of its pipeline soon. Management sounded pretty downbeat over Zynga’s contributions for its Fiscal Year 2023. I think the company is right to err on the side of caution as the economic recession nears.
If such a recession proves milder than expected, Take-Two will have an easier time marching higher, as many of its titles could prove more downturn-resilient, given gaming is a relatively cheap form of entertainment.
That said, the rise of gaming subscriptions has given many budget-conscious consumers less of a reason to pay more than $60 for a single game.
Is TTWO Stock a Buy?
Turning to Wall Street, TTWO stock comes in as a Moderate Buy. Out of 20 analyst ratings, there are 13 Buys and seven Hold recommendations.
The average Take-Two Interactive Sofware price target is $162.89, implying upside potential of 36.2%. Analyst price targets range from a low of $130.00 per share to a high of $200.00 per share.
Conclusion: More Than a Two-Hit Wonder?
Take-Two may seem like a two-hit wonder (with its GTA and Red Dead titles). However, with a Zynga-led mobile gaming push and other intriguing titles in the pipeline, Take-Two is more than worth a second look after its latest analyst-induced slump over lacking catalysts.
The wait for the next GTA will feel like a long one. Still, Take-Two has the tools to make the wait much less painful without rushing the development of GTA VI.
