Take-Two Interactive (TTWO 0.34%) is leveling up at a steady, predictable pace. The video game developer recently announced fiscal Q2 earnings results that landed right in line with management's early August forecast. Yet the owner of hit franchises like Grand Theft Auto reduced expectations around sales and earnings this year.

Let's take a look at whether that downgrade changes the long-term thesis for this digital entertainment stock.

Take-Two wins more engagement

The results through late September demonstrate why many investors see Take-Two as a great way to gain exposure to an attractive industry. Sales jumped 62% to $1.4 billion, and most of that revenue came from recurring spending. In that way, Take-Two looks like a software-as-a-service business that can count on a steady stream of predictable revenue.

Standout brands included NBA 2K23 and new content in the Grand Theft Auto franchise. These popular releases helped Take-Two grow engagement and audience size despite major headwinds in the video game industry. Gamers spent more within the company's ecosystem this quarter even as they pulled back spending elsewhere.

That success, "demonstrates the incredible quality of our games," management said in a shareholder presentation, "and the significant value that our interactive entertainment experiences provide our players ."

Warning signs

It wasn't all good news in this report, though. Take-Two saw slowing demand as economic growth rates decelerated in many markets. People pulled back spending in casual games and advertisers were less enthusiastic about purchasing inventory in these titles.

Overall, while Take-Two had hits in its mobile division, including with titles that came into the business through its Zynga purchase, the wider niche isn't as healthy as it was a few months ago.

In fact, the developer lowered its full-year sales outlook to between $5.4 billion and $5.5 billion from the prior range of between $5.7 billion and $5.8 billion. Roughly 70% of that downgrade was due to softness in the mobile gaming niche, according to management.

Looking ahead

That downgrade creates more uncertainty at a bad time for Take-Two. The company is busy on the integration of Zynga, the casual gaming giant it recently purchased for $12.7 billion. The acquisition was mainly aimed at giving Take-Two a bigger slice of the mobile market, which peers like Electronic Arts (EA 0.43%) have been dominating. A slump in this segment raises the risk that the company paid too much for Zynga and might not get nearly the return that management was targeting.

Investors shouldn't ignore Take-Two's huge competitive assets, including its diverse portfolio and the flood of content it is preparing to release over the next few years. The video game giant is poised to capitalize on the shift toward digital entertainment and subscription-type game spending. Even a weaker outlook has the company generating solid sales growth this fiscal year.

But Take-Two shareholders are likely to see a rough period ahead thanks to a cyclical slowdown in the gaming industry. The fact that this slump is disproportionately impacting mobile games means the Zynga purchase will take longer to deliver impressive returns.

The stock's slump in 2022 reflects the expectation that operating trends will likely worsen into 2023. Yet patient investors should consider buying Take-Two's stock at a big discount right now, while expecting some weak results ahead until the industry starts its next inevitable upswing.