What happened
Investors in Take-Two Interactive (TTWO 0.89%) are starting off Thursday on a high note, as positive comments from Barclays lifted their shares 2.6% through 10:45 a.m. ET.
So what
This morning Barclays announced it is raising its price target on the video game company by 8.5%, to $141 a share. (Hint: Take-Two stock currently costs $122 and change, so this is basically a prediction the stock will rise 15% over the next 12 months.)
As the analyst argues, Take-Two stock is cheap already at a valuation of 3.7 times sales, and could turn out to be even cheaper if the company's next earnings report (due out in mid-May) is able to "de-risk numbers further," as ratings-watcher The Fly explains.
Now what
All together now: "How cheap is it?" Well, as it turns out, that's not an easy question to answer.
On the one hand, yes, 3.7 times sales sounds like an attractive valuation relative to, say, Electronic Arts (which costs 4.8 times sales) or the even pricier Activision at 8.9 times sales. Then again, both EA and Activision are profitable companies, whereas Take-Two lost more than $400 million over the last 12 months, and most analysts are forecasting continued losses both this year and next.
On the other hand, Take-Two is generating positive free cash flow -- about $112 million. But that still works out to a massive valuation of more than 180 times FCF for the stock, which hardly seems cheap. True, there's still hope that the stock will look more attractively priced as profits improve. Next year, for example, S&P Global Market Intelligence has Take-Two generating positive FCF of nearly $795 million.
That implies a more palatable P/FCF ratio of 25.5 on the stock, and I suppose it justifies at least some optimism that the share price will recover. The fact that investors will have to wait nearly two full years for the profits to arrive, however, suggests that Barclays may be a bit premature in recommending Take-Two stock today.
