What happened
Shares of video game company Take-Two Interactive Software (TTWO 0.72%) jumped 41.3% in the first half of 2023, according to data provided by S&P Global Market Intelligence. The S&P 500 was up 15.9% during this time, so improving market conditions certainly helped. But most of Take-Two's gains came from a higher valuation of its stock.
Whereas its stock price jumped by 41%, Take-Two's price-to-sales (P/S) valuation increased by 36%, as the chart below shows.
Hypothetically, if Take-Two's business had grown by 41% and the stock had also gone up by 41%, then the valuation would have stayed the same. But as we can see with Take-Two, the market is willing to pay substantially more for a business that is only modestly bigger than it was at the start of the year.
So what
Some investors may wonder why the market is giving Take-Two stock a higher valuation now compared to six months ago. In my view, investors are increasingly optimistic about what's coming from the company in the near future.
For context, Take-Two's business isn't exactly blowing investors away right now. On Feb. 6, the company reported financial results for its fiscal third quarter of 2023, which came up short of expectations. Management also lowered its full-year guidance. But the stock went up the following day nonetheless because the market is optimistic about its pipeline of video games.
Excitement continued building when it reported financial results for the fiscal fourth quarter on May 17. Take-Two's management said it had the "strongest development pipeline in the company's history."
Over the last decade, Take-Two stock is up more than 800% -- it's created a lot of value. Therefore, management saying that its pipeline was stronger than ever was enough to boost investors' confidence. For this reason, they were willing to buy the stock at an increasingly higher valuation.
Now what
Take-Two stock may not be for everyone at today's price. The company's fiscal 2024 began in April. And in fiscal 2024, it expects to generate revenue of $5.37 billion to $5.47 billion -- modest improvement from its revenue of $5.35 billion in fiscal 2023. Moreover, management expects steep net losses of $477 million to $518 million.
Right now, Take-Two is working through some of the aftereffects of its $12.7 billion acquisition of mobile-gaming company Zynga in 2022. Zynga has contributed to higher overall revenue for Take-Two. But the company's gross margin has plunged and its total operating expenses have soared.
TTWO Total Operating Expenses (TTM) data by YCharts
Take-Two still has some of the best intellectual property in the video game world. It has also been financially strong historically, giving investors reason to optimistically expect improvement in time. Therefore, there may be reason to hold.
However, considering management isn't expecting much growth in the next year and it expects losses to continue, I believe there's time to wait for more concrete improvements before investing new money.
