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Is Take-Two Stock Still a Buy After Earnings?

By John Ballard – Aug 5, 2021 at 9:15AM

Key Points

  • Take-Two outperformed guidance, but investors were looking for a stronger outlook.
  • However, bookings have more than doubled from three years ago.
  • Management is still calling for a return to growth next year.

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The stock is down sharply as player engagement starts to normalize.

Take-Two Interactive (TTWO 2.22%) delivered bookings and adjusted earnings per share that were better than the consensus analyst estimate. However, management reiterated its full-year guidance for bookings to be down 8.5% over fiscal 2021 to a range of $3.2 billion to $3.3 billion. 

On top of that, management announced that the company is pushing back the release dates for two titles until later in fiscal 2022. Delays are the norm across the industry and shouldn't be a reason to sell a top video game stock. The overriding issue seems to be that investors were looking for a stronger outlook for the near term and management didn't offer that.

However, Wall Street's focus on short-term results is overshadowing the huge step up in demand Take-Two has experienced for its games over the last two years. This top game producer has reached a larger plateau of net bookings and players that it can build on to deliver market-beating returns to investors over the long term.

Three people in between a red arrow line pointing down and a green arrow pointing up.

Image source: Getty Images.

The long-term growth trend is intact

Take-Two's total net bookings came in at $711 million, which was above management's guidance. Apparently, market participants were looking for stronger outperformance over expectations, along with a raise to full-year guidance. They got neither, which explains why the stock is tumbling.

One of the most important metrics that investors watch is recurrent consumer spending, which includes purchases for add-on content, such as NBA 2K21's virtual currency. Net bookings from recurrent spending fell 25% year over year. While that was better than management's guidance that called for a 30% decline, Barclays analyst Mario Lu pointed out that this was a smaller beat than usual. This narrow outperformance seems to be contributing to the negative sentiment around the stock right now.

The incremental growth from the pandemic is clearly over. But comparing Take-Two's fiscal Q1 2022 performance to fiscal Q1 2021, which was the first full quarter of results after the pandemic started, gives investors the wrong perception that Take-Two is doing poorly -- yet that's not the case.

The reality is that demand for Take-Two's games is trending higher. Fiscal Q1 2022 bookings were 68% higher than the same quarter two years ago before the pandemic. Going back three years to fiscal Q1 2019, Take-Two's bookings are up 147%. In other words, players spent more than double the amount of money in the recent quarter than what they spent on Take-Two's games three years ago.

If Take-Two continues to see rising demand for its games like this every three years, investors could see the stock perform quite well over the long term.

Plenty of growth opportunities ahead

With negative sentiment settling in after the recent earnings report, I wouldn't expect the stock to make a quick recovery in the near term. But the huge increase in bookings over the last few years shows that Take-Two has many new players to sell new games to going forward.

Grand Theft Auto's player base is nearly double what it was two years ago, and NBA 2K saw 13% growth in first-time spenders in the recent quarter. 

The video game industry will continue to grow as it has for decades, and Take-Two plans to capitalize on this growing market with 62 new titles in development. It recently acquired animation studio Dynamixyz to bolster these efforts.

"We believe that we'll achieve sequential growth in fiscal 2023 and establish new record levels of operating results over the next few years," CEO Strauss Zelnick said. 

As I see it, investors who own Take-Two stock should hold their shares at the least, and if you've got the cash, consider buying more at these discounted prices.

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 recommends Barclays and recommends the following options: long January 2023 $115 calls on Take-Two Interactive. The Motley Fool has a disclosure policy.

Stocks Mentioned

Take-Two Interactive Software Stock Quote
Take-Two Interactive Software
TTWO
$108.76 (2.22%) $2.36

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