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Why Take-Two Interactive Stock Dropped 17% in February

By John Ballard – Updated Apr 11, 2019 at 8:39AM

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The game maker reported a monster quarter of growth, but investors wanted even more.

What happened

Shares of Take-Two Interactive (TTWO 0.55%) lost 17.3% in value last month, according to data provided by S&P Global Market Intelligence.

The maker of the best-selling Grand Theft Auto franchise released its fiscal third-quarter earnings report in early February. On the surface, the results were largely within expectations, with adjusted earnings slightly beating the consensus analyst estimate. Apparently, the company didn't convince investors that growth over the next year will be enough to justify the stock's valuation, which caused investors to bail. 

Take Two's Red Dead Redemption 2 game art depicting a bearded man wearing a cowboy hat and pointing a gun toward the viewer with a sunset and men riding horses in the background


So what

Take-Two reported GAAP net revenue of $1.249 billion, up from $481 million in the year-ago quarter driven by strong sales of Red Dead Redemption 2. The game has already sold 23 million units since its October launch. Profits soared as well, with net income improving from $25 million to $180 million year over year. 

For the full fiscal year (which ends in March), management expects net bookings -- a non-GAAP measure of revenue -- to reach a record of between $2.89 billion to $2.94 billion, representing year-over-year growth of 46% at the midpoint of guidance. Strong top-line growth is expected to lead to non-GAAP free cash flow of $680 million. 

Check out the latest earnings call transcript for Take-Two Interactive.

Now what

Overall, it was a solid quarter, but with the stock's forward P/E above 20 times expected earnings going into the quarter, investors were looking for more bullish comments from Take-Two's management about near-term growth, particularly around monetizing Red Dead Online -- a new multiplayer feature for the game that is currently in beta. Nonetheless, management made it clear they have plenty in the pipeline, with several games on tap for release across console and mobile over the next few years. 

The selling may have been overdone, as Red Dead Redemption 2 sold well enough that management raised its guidance for fiscal 2019.

Additionally, investors should note that Take-Two is in the early innings of monetizing Red Dead Online. The company's monthly active users are at their highest-ever level across Grand Theft Auto and Red Dead Redemption, which gives Take-Two plenty of opportunity for in-game monetization going forward. 

John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Take-Two Interactive. The Motley Fool has a disclosure policy.

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