Take-Two Interactive (TTWO -0.33%) investors just received a nasty surprise. The video game giant lowered its 2022 full-year outlook despite posting strong growth in the quarter that ended in September.
Worse yet, the new forecast calls into question some of the key reasons behind management's expensive acquisition of Zynga earlier this year.
Let's take a closer look at that challenge to Take-Two's short-term growth, along with one big reason to still love this stock right now.
The red flag: Mobile growth
It is no secret that the video game industry is in a cyclical slowdown today following two years of big gains. Engagement levels just aren't as high as they were in earlier phases of the pandemic.
But Take-Two is feeling the heat more acutely than some peers. After making a $13 billion bet largely on the mobile market to fuel future growth, that industry segment is declining rapidly. Gamers aren't as engaged, and advertisers aren't spending as much to gain access to those eyeballs.
Management lowered its fiscal 2023 outlook as a result, with most of the downgrade (just over two-thirds, according to executives) coming from weakening trends in the mobile portfolio.
The slump also raises the risk that Take-Two overpaid for its early 2022 acquisition of Zynga. Stock valuations declined significantly since then, and a weaker mobile gaming industry almost surely means that it will take longer to get the positive returns that management was budgeting from the deal.
The green flag: Portfolio strength
Ironically, it might be Take-Two's older business that ends up sustaining it through this current downturn. Content sold well in the 2K sports franchises and in Rockstar Games' brands such as Red Dead Redemption and Grand Theft Auto. Gamers are purchasing titles in these brands, but also signing up for season passes and other live services.
Take-Two says this "post-launch monetization" strategy applies to all its game releases now, and it is powerful. "We experienced healthy player engagement, driven by exciting new game releases," CEO Strauss Zelnick said in a conference call, "even as consumers continued to navigate the effects of various macroeconomic and geopolitical factors."
Looking ahead
The next few quarters might have weaker overall growth as the mobile segment pressures the wider business. Executives say they are just as confident about the long-term returns on the way from the Zynga acquisition, including over $500 million in annual sales and access to more revenue streams like digital advertising.
Wall Street is focusing more on Take-Two's red flag today, plus the weak short-term outlook for the industry. That focus helps explain why the stock is down over 45% so far in 2022.
But Take-Two has a packed portfolio of content releases on the way, even if gamers are spending a bit less freely in some casual niches. Those launches might help the stock recover some of its recent losses into 2023. But investors should brace for more volatility ahead over the next few quarters as big parts of the video game industry continue to slow.
