Shares of Take-Two Interactive (TTWO -0.46%) have surged strongly over the past month despite downgrades in mid-September by Wall Street analysts who think that delays in the launch of new video gaming content will weigh heavily on the company's performance.
BMO Capital Markets analyst Gerrick Johnson slashed his rating on Take-Two stock from outperform to market perform on Sept. 17, stating that the four-month delay in the launch of the enhanced versions of games in the popular Grand Theft Auto franchise would mean that the company will lose out on the lucrative holiday season. Take-Two plans to release the improved versions of Grand Theft Auto V and Grand Theft Auto Online for PlayStation 5 and Xbox Series X/S in March 2022 as opposed to its original plan of Nov. 11, 2021.
TTWO data by YCharts
But the recent stock price action indicates that investors are not worried about this delay, which has allowed Take-Two shares to stage a terrific recovery after a poor performance for most of the year. Take-Two stock's rally could get a shot in the arm when the company releases its fiscal 2022 second-quarter results on Wednesday, Nov. 3. Let's see why that may be the case and go over the reasons why buying this video game stock right now could turn out to be a prudent long-term decision.
Take-Two Interactive has the potential for surprise
The game launch delays haven't thrown off Take-Two's near-term prospects. The company reiterated its full-year guidance while announcing the news in September, citing "strong engagement trends in its existing games, as well as the planned release of new games from its pipeline during the balance of its fiscal year," according to Yahoo! Finance.
Take-Two expects to finish fiscal 2022 with revenue of $3.19 billion at the midpoint of its guidance range. That would be a slight decline over fiscal 2021's revenue of $3.38 billion, but it is worth noting that the company is facing tough comparisons to last year when the demand for video games spiked and supercharged its revenue and earnings. So the mid-single-digit percentage revenue decline that Take-Two anticipates for this year isn't all that bad.
Image source: Getty Images.
Meanwhile, Take-Two's net bookings are expected to range between $3.2 billion and $3.3 billion this year, which would translate to an 8% drop over fiscal 2021's record figure of $3.55 billion. But don't be surprised to see Take-Two's net bookings and revenue for the year exceed its original guidance. That's because the company has a habit of delivering conservative guidance but overdelivering when the results are released.
For instance, Take-Two has beaten Wall Street's earnings estimates by big margins in the past four quarters, as its titles have been bringing in new consumers while encouraging gamers to spend more. That's evident from the fact that its fiscal Q1 net bookings of $711 million easily exceeded its guidance range of $625 million to $675 million. Net bookings refer to the net proceeds from products and services that Take-Two sells digitally or physically during a particular period, including revenue from merchandise, in-game advertising, and licensing fees.
Take-Two credits net bookings growth to Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2, Red Dead Online, and Borderlands 3, which continue to attract new users and drove recurrent spending. Grand Theft Auto Online, for instance, has seen a 77% increase in new players since the first quarter of fiscal 2020, while Red Dead Online has recorded 26% growth over the same period.
Take-Two management recently pointed out that its existing games are continuing to record strong engagement rates, and its net bookings could once again exceed expectations and give investors reasons to be bullish about the stock.
Robust video gaming demand will be a long-term tailwind for the company
The recent surge in Take-Two's stock price despite Wall Street downgrades indicates that investors are probably focusing on the bigger picture. The fact that Take-Two has stuck to its guidance despite delaying updates to its popular games indicates that it has built a sticky user base, with recurrent spending by users continuing to drive its results.
Meanwhile, the company operates in an industry that's set for secular growth in the long run, and it owns some of the biggest gaming franchises, which should help it tap into the end-market opportunity.
Grand Theft Auto V, for instance, has sold more than 150 million copies globally, making it the most successful gaming title ever from a financial standpoint. The Red Dead Redemption series has sold more than 60 million units so far, while the NBA 2K series has sold more than 112 million units worldwide.
According to a third-party estimate, the global video gaming market could hit $286 billion in revenue by 2025, compared to $208 billion last year. Around 2.8 billion people play video games across the globe, a number that's expected to hit 3.07 billion by 2023. Take-Two has a pipeline of 62 games in development for the next three years, with 21 of them expected to hit the market in fiscal 2022 and the remaining 41 spread over fiscal years 2023 and 2024.
This puts Take-Two in a solid position to tap into the secular growth of the video gaming industry, as it can attract new users and encourage existing customers to spend more money. Not surprisingly, Take-Two's bottom line can improve substantially in the coming years.
TTWO EPS Estimates for Current Fiscal Year data by YCharts
Finally, Take-Two stock is trading at just 32 times trailing earnings right now, which is a nice discount to its 2020 trailing earnings multiple of 50. So buying this growth stock right now looks like a no-brainer given the tremendous long-term opportunity it is sitting on.
