Take-Two Interactive (TTWO +2.27%) crushed expectations in the fiscal fourth quarter. The consensus analyst estimate called for Take-Two to post $664 million in bookings for the quarter, but the company behind the popular Grand Theft Auto and NBA 2K franchises reported actual bookings of $785 million. The stock is currently up 14.8% over the last week at the time of this writing.
During the fiscal fourth-quarter earnings call, CEO Strauss Zelnick made a bold prediction that "over the next few years, we believe that we will establish new records of operating results even above the spectacular performance we delivered this past year."
It's normal for CEOs to be bullish, but there are two reasons investors are fired up about Take-Two's optimism.
Image source: Take-Two Interactive.
1. Take-Two likes to underpromise and overdeliver
Take-Two has a history of delivering conservative financial guidance. Going back to the fiscal 2019 first quarter, Take-Two has only missed earnings estimates once. For Zelnick to state that the company expects to achieve new records in operating results over the next few years is very meaningful in that context.
Keep in mind, though, that management is not calling for future growth to be smooth year to year.
Take-Two just posted record bookings of $3.55 billion for fiscal 2021, representing a strong growth rate of 19% year over year. But the company expects to experience a moderation in growth this year following the surge in player engagement during the pandemic. Management's guidance calls for fiscal 2022 bookings to be between $3.2 billion and $3.3 billion.
But analysts are not buying it. Currently, the consensus analyst estimate has Take-Two performing better than management's guidance, with bookings expected to be $3.51 billion, or a slight decrease of 1.3% year over year.
I would bet on analysts' estimates over management's outlook at this point. Consider that fiscal 2021 bookings came in approximately $1 billion greater than management's original guidance issued in May 2020. And the year before that, Take-Two's actual bookings came in approximately 17% higher than original guidance.
2. A stacked release slate
Take-Two plans to release 21 new titles in fiscal 2022 (which ends in March). Among these are OlliOlli World from Take-Two's Private Division label and 10 free-to-play mobile games.
With an upcoming release slate that also includes a new version of Grand Theft Auto V designed for the new game consoles, Zelnick said that "we're highly optimistic about our growth trajectory."
To prepare for future demand for its titles, Take-Two is investing to expand its development staff, IT, and other infrastructure.
These investments will pressure profits in the near term. Guidance calls for operating expenses to grow 18% in fiscal 2022, primarily reflecting higher personnel costs, stock compensation expenses, and the inclusion of PlayDots, a mobile game studio that Take-Two acquired last year.
However, management expects these expenditures will lead to further growth in the business and higher margins in the next few years.
Looking beyond the near term, CFO Lainie Goldstein said: "[W]e expect that engagement trends will be notably higher than they were pre-pandemic." Zelnick noted that the company welcomed many new players over the last year to its games and that player engagement in NBA 2K, specifically, "remains incredibly strong with more than 2.3 million users playing the game daily."
Time will tell on the expectation for healthy post-pandemic engagement, but I'll give this top video game stock the benefit of the doubt, considering Take-Two's history of issuing conservative growth expectations and delivering market-beating returns for investors.
