It was a shot heard ’round the investing world as massive game maker Take-Two Interactive (TTWO) purchased much-less-massive game maker Zynga (ZYNG). The news sent Zynga blasting up nearly 10% in premarket trading on Monday, but sent Take-Two down nearly that same amount. Worse, Take Two’s negative momentum carried on into Monday morning’s trading as well. The market seems to think this move a mistake, but I’m still bullish on Take-Two Interactive.
Take-Two Interactive has had a downright frantic year in share prices. The company kicked off the year by spending the first six weeks bouncing between $195 and $235 per share. Mid-February, meanwhile, brought the first major leg down that the company would see that year. By the end of March’s first week, Take-Two was threatening to break the $160 mark. In turn, that kicked off a new leg upward as the company recovered to around $183 about a month later. More up and down movement would follow until August, when a new leg down began that threatened to break the $145 mark for the first time since 2020. Another recovery kicked in, and by November, breaking the $200 mark once more looked like a serious possibility. That didn’t last, however, as a series of ups and downs kicked in, bringing us to today, the latest down in a string of them.
Take-Two was down as much as nearly 15% in trading on Monday. This all took place after the announcement of its plans to buy Zynga in a deal valued at $12.7 billion in cash and stock.
Wall Street’s Take
Turning to Wall Street, Take-Two Interactive has a Strong Buy consensus rating. That’s based on nine Buys and three Holds assigned in the past three months. The average Take-Two Interactive price target of $213.83 implies 49.54% upside potential.
Analyst price targets range from a low of $180 per share to a high of $235 per share.
A Great Strategy, but Questionable Tactics
Granted, I’m not exactly happy about this move. I’m not completely sure what would compel Take-Two Interactive to buy an at-best-marginal gaming company in an 11-figure deal. I’m not sure why Take-Two felt it had to pay a 64% premium to get Zynga.
Take-Two’s CEO, Strauss Zelnick, attempted to explain the deal, but didn’t add much to the overall conversation. Zelnick noted that the company was “…trying to build a business over a very long period of time.” Moreover, word from Take-Two’s press representatives noted that the combined Zynga and Take-Two would ultimately “…(unify) highly complementary businesses, including Take-Two’s best-in-class portfolio of console and PC games and Zynga’s industry-leading mobile franchises.”
Zynga’s focus is primarily on mobile games, and the company got a good shot in the arm from pandemic lockdowns. That gives extra credence to the idea that Take-Two might want to take advantage of Zynga’s mobile chops. After all, Take-Two is laden with quality franchises. From Red Dead Redemption to Grand Theft Auto, there are a lot of options here. A quality mobile game developer could take that rich fodder and give Take-Two access to a substantial new market vector. Certainly, several Take-Two properties are ripe for such development. Take-Two, after all, developed the legendary Master of Orion space strategy game back in 1995. A Master of Orion mobile game could be a serious winner, and that’s just for starters.
Take-Two expanding into mobile games is a great idea, but why Zynga? And why at such a colossal premium? Take-Two Interactive’s dividend history doesn’t help here, as it doesn’t seem to exist. However, a look at Zynga suggests a possible reason why; Zynga games have around 183 million monthly active users as it is. Within the first two years of closing the deal, reports note, the cost synergies involved are set to clear $100 million a year. Annual net bookings are expected to come in around $500 million. That means a payback period of less than three years, assuming the numbers hold.
Concluding Views
Take-Two branching out into mobile games makes sense. People are turning to their smartphones and tablets for a little shot of gaming, wherever they happen to be at the time. Taking advantage of that trend is a good play, and Take-Two’s huge line of franchise titles can only help such an endeavor succeed. Throw in the fact that Take-Two is trading well below its lowest price targets, and that suggests a buy-in point in progress.
I’m bullish on Take-Two because it’s a major name in gaming with a huge portfolio of intellectual property to back it up. Attempting to monetize that property further with mobile gaming is a fine strategy. Why it decided to buy up Zynga to get there, and pay a huge premium to do so, is less clear. Despite this, however, Take-Two is still Take-Two. And Take-Two is still a major figure in gaming, Zynga deal or no.
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