Investors in Take-Two Interactive Software (TTWO +1.43%) just leveled up. The stock jumped in response to the video game developer's recent earnings report and is trouncing the S&P 500 so far in 2023.
Wall Street is looking past the company's current losses and management's prediction for slow growth this fiscal year and focusing on the brighter future. Take-Two is planning for massive improvement over the next several years thanks to a packed pipeline of game releases.
Should investors jump on board with that bullish outlook, or wait for more concrete signs of a growth rebound? Let's take a closer look.
Take-Two Interactive is beating targets
Take-Two closed out its fiscal year on a positive note. Bookings growth edged past management's forecast thanks to strong demand for franchises like Grand Theft Auto, Red Dead Redemption, and Zynga's portfolio of casual games. Executives said big-name titles performed well even as gamers scaled back their overall spending. Sales jumped 53% for the full year thanks to a big assist from the Zynga acquisition.
NASDAQ: TTWO
Key Data Points
Investors were also happy to hear that the huge Zynga purchase is surpassing management's expectations around growth and early returns. "We're immensely proud of the trajectory of our integration and the strength of our shared culture and values," CEO Strauss Zelnick said in a conference call.
But it also endures continued losses
The news wasn't as good around profits. Take-Two booked several one-time charges tied to the acquisition this past year. The company took impairment charges around a few games it canceled in the development stage, too, in response to shifting demand. These challenges helped push net losses to over $1 billion, or $7.03 per share, in fiscal 2023. Take-Two posted net earnings of $456 million a year earlier.
Investors can't count on a quick improvement here, either. Management forecast a second consecutive year of net losses, with red ink amounting to roughly $500 million in fiscal 2024. These losses are being partly driven by more integration challenges, but also by the delay of a few large titles that will now launch in fiscal 2025.
Looking ahead
The new fiscal year will bring close to zero growth as bookings land at about the same $5.4 billion that investors saw in fiscal 2023. But Take-Two couldn't be more optimistic about the long term.
In fact, management is aiming for over $8 billion of bookings in 2025 along with more than $1 billion of operating cash flow. These results will be powered by "several groundbreaking titles" that have already been in development for years, claims Zelnick.
Yet fiscal 2025 is a long way off, and selling conditions could worsen by then. There's always the potential that a few big releases encounter more delays or sell poorly at launch. And the current fiscal year will almost surely look weak compared to Take-Two's long-term outlook.
Patient investors might look past those risks and focus on the company's progress in laying the groundwork for massive growth starting in about one more year. Yet the stock's price-to-sales valuation doesn't make it a screaming buy today. Shares are valued at over 4 times sales, up from 3 in late 2022.
Take-Two can earn that valuation and even expand it, but first it will have to start taking firm steps back to positive cash flow. Investors should wait for those signs before jumping into this video game stock.
