What happened
Shares of video game maker Take-Two Interactive Software, Inc. (TTWO 2.02%) jumped 22.1% last month, according to data provided by S&P Global Market Intelligence, after the company reported another blowout quarter.
So what
Fourth-quarter revenue jumped 52% to $571.6 million on the back of Mafia III and the Grand Theft Auto series. Digital revenue was up 43% to $278.7 million, a sign that management is evolving to find ways to make money beyond the traditional console games. And due to the leverage inherent in the video game business, net income more than doubled to $99.3 million, or $0.89 per share.
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The video game business has been hot so far in 2017, with Activision Blizzard and Electronic Arts both reporting better-than-expected numbers for the first quarter, resulting in their stocks moving higher.
Now what
Revenue and earnings growth is strong across the video game world as companies find new ways to engage with customers and turn content into digital revenue. The days of going to the store and buying console games are over, so this transition was an important one to make, and investors don't seem to have anticipated how quickly companies like Take-Two Interactive could change course to digital revenue streams.
The question now is whether or not these video game stocks are overvalued. Take-Two's management is expecting $4.35 to $4.65 per share in earnings during fiscal 2018. At the midpoint, that means shares are trading at 16.4 times forward earnings estimates. If growth continues, that will look cheap, but if it slows, shares could sink from their new highs. It's likely only continued operational improvement will keep this stock moving higher.
